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Britain’s energy regulator is considering increasing household bills to help suppliers offset record levels of customer debts as household budgets are squeezed by the cost of living crisis.
Ofgem said on Thursday it was looking at adjusting the domestic price cap, which governs the amount paid for gas and electricity, after consumer debt to suppliers hit its “highest ever” level of £2.6bn.
Ofgem, which warned that debt levels were expected to rise further, is keen to avoid a repeat of the market rout in late 2021 and 2022 when soaring wholesale gas prices triggered the collapse of 30 suppliers, which ultimately added £82 to each household’s bill to cover the cost of bailing them out.
It said consumer debts had climbed due to a combination of “the rise in wholesale energy prices, and wider cost of living pressures”.
The regulator said it was now considering increasing the amount suppliers could claw back through an existing mechanism that allows them to recoup the costs of recovery of outstanding payments and bad debts through household bills.
Ofgem said any one-off adjustment could add about £17 to an average annual household bill but consumer groups warned any such move could prove counterproductive given the already high cost of energy that has helped push up debt levels in the first place.
“An increase in the price cap to pay for higher debts will make people’s bills even more unaffordable. Any change must be in the best interest of all consumers,” said Clare Moriarty, chief executive of consumer group Citizens Advice.
Households have been grappling with a surge in energy bills following the jump in wholesale gas prices. The price cap, which governs British energy bills, climbed from £1,216 in October 2021 to £4,059 in January 2023.
The government stepped in to limit annual bills to an average £2,500, by subsidising suppliers. However, blanket support has now finished and bills are still far higher than long-term averages: the price cap for the October to December period is £1,923.
The level of debt facing suppliers has been compounded by a moratorium on the forced installation of pre-payment meters. Ofgem said the ban had increased suppliers’ debt-related costs by about £25mn per month between February and June, with “further significant costs” expected this year.
Tim Jarvis, director-general for markets at Ofgem, said any increase in the price cap was “not one we take lightly” but “we must look at all the regulatory options available to us”.
He added: “Ofgem cannot subsidise energy or force businesses to sell it at a loss and suppliers must be in a position to offer high-quality services to customers.”
Ofgem has opened a consultation on the adjustment to the price cap. If enacted, the increase would take effect in April 2024.