Ofgem considers major price cap overhaul as energy bills could hit £1,999 in January

The regulator is considering how its price cap should work for time-of-use tariffs, which charge different rates at different times of day.

These deals could help households save by moving electricity use to cheaper periods. However, Ofgem has acknowledged that people unable to change their routines must remain protected.

No final decision has been made. Initial changes to the way the cap is calculated for these tariffs are targeted for the second half of 2027.

More than 20 million households currently fall under the cap’s protection, representing over 60 per cent of domestic customers.

The cap limits the rates suppliers can charge on covered tariffs. It does not limit a household’s total bill, which depends on energy use.

What could change?

Ofgem is considering three approaches.

The first would introduce two or three time bands, each with a maximum electricity unit price reflecting the average cost of supplying power during those hours.

Households could therefore face a higher capped rate during expensive periods and a lower one when electricity is cheaper.

The second would create different cap structures for different household groups. Homes with electric vehicles could fall into one category, while those with heat pumps could have another, reflecting their different patterns of electricity use.

The third would let suppliers design their own time-of-use cap structures using Ofgem’s half-hourly cost data and customer demand profiles.

Ofgem would assess whether the tariffs and customer groupings were fair. This would give suppliers greater flexibility but would be harder to oversee.

The review does not mean every household has been told to move onto a time-of-use tariff.

Why is Ofgem considering changes?

Electricity tends to be cheaper when wind and solar generation are plentiful. Prices rise during busy periods when the grid relies more heavily on gas-fired power stations.

A new system called Market Wide Half Hourly Settlement will make suppliers’ costs more closely reflect when customers use electricity.

It accounts for consumption in each 30-minute period, replacing the broad demand profiles used previously.

Households using electricity during expensive periods will cost suppliers more to serve. Those shifting usage to cheaper times will cost less.

Ofgem says the existing cap framework could hold back flexible tariffs. It was designed when Economy 7 was essentially the only widely available time-of-use product.

Who could benefit?

Electric vehicles, heat pumps, home batteries and smart appliances could help households move electricity use away from expensive periods, including automatically.

But people who cannot shift their usage must not be unfairly penalised.

The review supports the Government’s Clean Power 2030 ambitions. Ofgem says Britain will need between 10GW and 12GW of consumer-led flexibility by the end of the decade as electricity demand grows and reliance on variable renewable power increases.

By September, roughly 24 million electricity supply points had moved onto half-hourly settlement. The transition is due to finish by May next year.

The consultation, launched on Tuesday, closes on 20 November.

What is happening to bills now?

The cap rose by four per cent on October 1. Cornwall Insight forecasts another 16 per cent increase in January, taking a typical household’s annual bill to £1,999.

That would be £276 more than the current level and the biggest rise since January 2023. It remains a forecast.

Ofgem chief executive Tim Jarvis warned: “It’s going to be a difficult winter.”

He added: “But I think I share the concerns of many of you that people are going to struggle this winter without some help, and the earlier we can get decisions and we can work with the sector to help implement them the better.”

Campaigners want an “emergency heat tariff” to limit heating costs. A Uswitch poll suggests 1.7 million households plan to leave their heating off this winter.