Future Price Protection Discussion Paper

What this is about

Ofgem is opening a discussion on whether the default tariff cap — the mechanism that has regulated domestic energy prices since January 2019 — needs structural reform. The cap was introduced under the Domestic Gas and Electricity (Tariff Cap) Act 2018 as a temporary measure, originally due to expire at the end of 2023, but extended by statute to March 2026. This paper asks whether the cap should continue in its current form, evolve into something different, or be replaced entirely.

The timing is deliberate. The cap did what it was designed to do during the 2021-2023 energy crisis: it limited what suppliers could charge, and it drove down supplier costs by forcing them to compete on efficiency rather than margin. But the crisis also exposed its limitations. The cap socialises wholesale price risk across all consumers uniformly, which means suppliers cannot offer products that reward flexibility, shift demand, or price risk differently for different customer types. As the retail market moves toward time-of-use tariffs, smart meter-enabled products, and electrification of heat and transport, a flat quarterly cap on unit rates becomes an increasingly awkward fit. Ofgem frames this as part of a broader retail reform programme alongside its work on standing charges, affordability and debt, and the ban on acquisition-only tariffs.

Options on the table

The landing page references "a broad spectrum of options for evolving consumer price protection" set out in the full discussion paper (a 1.09MB PDF). The source text available here is the consultation landing page only, not the paper itself. Based on the framing and the regulatory context, the options under discussion fall along a spectrum:

#### Retain and refine the current cap

Keep the quarterly price cap methodology but adjust its parameters — for example, changing the allowance for wholesale cost hedging, adjusting the headroom allowance that gives suppliers margin above efficient costs, or moving to a different update frequency. This is the path of least resistance. It preserves the consumer protection guarantee but does not address the structural tension between a flat cap and a market that needs dynamic pricing. Consumers keep the certainty of a maximum bill; suppliers keep the constraint on product innovation.

#### Restructure the cap to allow time-varying pricing

Modify the cap so it sets a ceiling on average cost but permits time-of-use variation within that ceiling. This would let suppliers offer tariffs that are cheaper at off-peak times and more expensive at peak, provided the overall package does not exceed the cap. Consumers with smart meters and flexible demand win — they can shift load and pay less. Consumers who cannot shift (those on prepayment meters, with medical equipment, or without smart meters) need a fallback, or they lose. The risk is that the cap becomes a more complex instrument that is harder to communicate and harder to enforce.

#### Replace the cap with a relative price protection mechanism

Instead of setting an absolute ceiling on prices, regulate the gap between the cheapest tariffs and the default tariff. This is closer to the CMA's original remedy proposal that preceded the cap. It would allow prices to move with the market but prevent suppliers from charging disengaged customers significantly more than engaged ones. Suppliers gain pricing freedom; consumers who actively switch benefit from competitive pressure; consumers who do not switch are protected from the worst of the loyalty penalty but not from wholesale price movements.

#### Allow the cap to expire and rely on competition plus targeted protection

Let the cap lapse when the current legislative extension ends and rely on competition, enhanced by Ofgem's other retail reforms, to protect consumers. Vulnerable consumers would be protected through targeted mechanisms — social tariffs, prepayment meter safeguards, or the Warm Home Discount. This is the option that best aligns with efficient price signals but carries the highest political risk. The cap is popular. Removing it in anything other than a falling-price environment would be difficult to defend publicly.

Questions being asked

The full set of consultation questions is in the discussion paper PDF, which is not reproduced in the source text. The landing page states that Ofgem is "seeking written comments on the questions set out in the discussion paper" and particularly welcomes responses from consumer groups and charities, suppliers and investors, other stakeholders, and the public. The questions are likely to cover:

- Whether the current cap remains fit for purpose - Which alternative models of price protection merit further development - How to balance consumer protection with the need for dynamic, cost-reflective pricing - What safeguards are needed for vulnerable consumers under any reformed regime - How price protection interacts with the transition to smart meters and time-of-use tariffs

Without the PDF, specific question wording cannot be reproduced here.

How to respond

- Deadline: Friday 10 May 2024 - Preferred method: Complete the [Future of Domestic Price Protection response form](https://www.ofgem.gov.uk) on Ofgem's website - Alternative: Email responses (including PDF, Word, or Excel attachments) to future_price_protection@ofgem.gov.uk

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*Note: This memo is based on the consultation landing page. The full discussion paper (PDF, 1.09MB) contains the detailed options and consultation questions. A complete briefing would require review of that document.*