UK energy cap could be hiked by 14% next year, experts say

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The UK summer 2022 energy cap could be hiked by 14% to GBP1,455 per annum compared to next winter’s figure, according to industry experts.


Future default cap levels will be confirmed in February 2022, but the nature of the cap methodology means that some of the recent wholesale increases are already being priced in, analysts at Cornwall Insight said.


READ: Gas crisis: Energy cap to remain insists Business Secretary


“The wholesale price methodology for the default tariff cap changes on a seasonal basis and effectively uses a 12-month rolling hedging strategy applied on a continuous quarterly (gas) or seasonal (electricity) basis,” said senior consultant Dr. Craig Lowrey.


“In the case of the Winter 2021-22 cap, the observation window closed at the end of July 2021, with those energy suppliers that had not been able to hedge their positions in line with the cap methodology retaining an element of exposure to the wholesale market.


“It also means that we are already in the six-month window for the Summer 2022 cap, and with record wholesale prices now being priced in, we would need to see a material and sustained reduction in the wholesale market to avoid the kind of cap levels we are predicting for that period.”


Smaller suppliers, which are the ones to be most affected by the UK government’s decision to keep the current cap, usually can’t hedge in the medium to longer-term way like their larger counterparts because of hefty trading fees.


However, if the market starts falling, they would benefit from the more flexible, shorter-term hedging strategy.





“From an energy supplier perspective, the government has stated that it is considering financial support for larger suppliers to help them assume the portfolios of the failed companies, which would be their smaller counterparts. However, the question is which of the large suppliers will remain after what appears to be a period of forced consolidation – especially when you look at a company like Bulb, which, with 1.7mn customers, would typically be perceived to be “large”,” Lowrey continued.


“From a non-domestic end-user perspective, the inevitable focus has been on the energy-intensive industries, but there is a wider perspective as it will be hard for any customer to realistically avoid these impacts on an enduring basis.”

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