UK energy price cap predicted to rise to £1,660

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As a result of wholesale gas and energy prices continuing to reach new records, Cornwall Insight’s modelling for the Summer 2022 default tariff price cap has risen once again, with its indicative forecast climbing to approximately £1,660 ($2, 258).

Despite a long way to go and a lot of uncertainty to resolve before there is confirmation of these figures, we note that the implied Summer 2022 cap level would increase by approximately 30% on the record level seen for Winter 2021-22.

Dr. Craig Lowrey, Senior Consultant at Cornwall Insight, said: “These figures reflect material increases in the period since our most recent default tariff cap forecast. With wholesale gas and electricity prices continuing to reach new records, successive supplier exits during September 2021 and a new level for the default tariff cap (£1,277 for a typical dual fuel direct debit customer) for Winter 2021-22, the GB energy market remains on edge for fresh volatility and further consolidation.

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“Despite the record levels seen in the wholesale market which are contributing to the forecast increases in the default tariff cap, additional costs resulting from the succession of supplier exits risk contributing to even higher costs – these being charges under the Supplier of Last Resort (SOLR) scheme and industry support schemes for which the former suppliers were liable. Although the price cap methodology is structured to accommodate both outcomes, the extent to which they will be relied upon means that the impact on all consumers – not just domestic ones – could be felt into 2023. 

“Under the SOLR scheme, those suppliers taking on customers of the exited companies can make a claim to Ofgem under the Last Resort Supplier Payment (LRSP), which is a means by which the acquiring SOLR supplier can claim any additional costs above those it expects to recover from the transferred customers – which includes any outstanding credit balances. Due to how the LRSP is recovered, the costs of this are met by electricity and gas distribution network companies, which recover them through their industry charges on consumers. Therefore, supplier exits via SOLR can lead to higher costs for all consumers.

“Due to the speed and frequency of exits under the SOLR process, details of the relevant Administrator’s proposals – which would normally be expected to contain details of credit balances and other financial liabilities – have not yet been published. However, we note that use of the SOLR process since January 2018 has resulted in eight claims totalling approximately £56mn, with several acquiring suppliers using the scheme to recover a proportion of customer credit balances.

“Therefore, with supplier exits since the start of August already into double figures, the prospect of further claims – and additional costs for consumers – is apparent, although when these costs will reach bills is unclear.

“Additional costs must also be met due to the failed suppliers not having paid their charges from mandatory industry schemes, namely the low carbon generation support mechanisms of the Renewables Obligation (RO) and Feed-in Tariff (FiT).

“Although our estimates of the cap for Summer 2022 and Winter 2022-23 exclude such effects given the extent of the uncertainty surrounding them, it is apparent that these costs will ultimately be borne by the industry as a whole and by customers in particular.

“While they have historically been comparatively small amounts in terms of their impacts on bills, the extent and frequency of the supplier exits risks pushing the normal approach of cost recovery into uncharted territory and having unknown impacts on an already stressed retail supply sector.

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“The explosion of choice and innovation seen in the sector in the last decade by challenger suppliers has been fundamentally altered in a matter of months, and while all eyes will inevitably be on this winter, the need for an enduring solution to ensure that the gains experienced by almost three decades of competition are not lost.”