The energy price cap is expected to surge from £1,971 to £2,800 a year in October, the boss of Ofgem has told Rishi Sunak, piling further pressure on the chancellor to help struggling Britons through a deepening cost-of-living crisis.
The energy regulator’s chief exective, Jonathan Brearley, told MPs on the Business, Energy and Industrial Strategy Committee that he would write to the chancellor telling him he expected the cap to be “in the region of £2,800” when it is reviewed later this year.
Gas prices were “higher and more volatile” in the wake of Russia’s invasion of Ukraine, Mr Brearley said.
"I know this is a very distressing time for customers, but I do need to be clear with this committee, with customers and with the government about the likely price implications for October.”
He stressed that the wholesale prices used to calculate Ofgem’s cap were uncertain and could change between now and October.
Mr Brearley’s warning came as petrol and diesel prices rose to new record highs and Rishi Sunak reportedly considered imposing a windfall tax on energy generators that have reaped bumper profits while UK households face a cost of living crisis.
The chancellor has instructed Treasury officials to work on plans for a potential tax on more than £10bn of excess profits made by electricity generators, according to sources cited by the Financial Times.
High prices have benefited energy generators, but have also caused dozens of suppliers to fail.
Former Ofgem chief executive Dermot Nolan admitted to MPs on Tuesday that the regulator could have stopped some of those failures “if we had moved faster”.
Mr Nolan, who led Ofgem between 2014 and 2020, told the committee that he did not believe any regulatory regime could have prevented large numbers of energy firms going bust in the wake of unprecedented rises in gas and electricity prices.
He described recent increases in wholesale energy costs as a “once in a 100-year event” and argued that Ofgem had followed requests from government to prioritise competition over regulatory supervision because of the “Big Six” firms’ dominance of the market.
Mr Nolan claimed that Ofgem’s ability to supervise firms had been hampered because implementing the price cap had taken up “massive amounts of resources”.
When asked why he had allowed Ofgem’s enforcement team to shrink by a quarter between 2018 and 2021, Mr Nolan said: “I don’t know. I literally can’t remember.”
The regulator has been heavily criticised for allowing too many firms to set up with minimal checks on whether they had the required skills or were financially resilient enough to survive big price swings.
Customers and taxpayers have been left picking up the tab for dozens of failed firms, some of which collapsed after failing to properly hedge against the risk that prices would rise sharply.
Mr Nolan said that from around 2015 “many” new firms entered the market under a “permissive” regime “encouraged by government but also a conscious decision of the Ofgem board”.
Ofgem didn’t think it could only allow large firms with lots of capital to enter the market, Mr Nolan said. He conceded that firms had been allowed to fail without their owners facing financial detriment.
However, it became apparent from 2017/18 that “in certain cases firms had entered the market in a speculative manner that was probably not reasonable and not fair, and we needed to do something about it”.
Mr Nolan said: “I don’t think any regime would have been entirely fit for purpose, but I do accept that if we have moved faster we would have stopped some of the failures that have happened.”
Downing Street acknowledged that energy prices were a "significant challenge" after Brearley suggested the cap could rise to about £2,800 in October.
The Prime Minister's official spokesman said some of the help from the government was "phased throughout the year".
Meanwhile, fuel prices continued to climb to record highs, with new official figures showing the average cost of a litre of petrol at UK forecourts was 167.7p on Monday.
That was up from 165.1p a week earlier. The average price of diesel on Monday was 181.14p per litre, up from 179.7p last week.
