The UK energy watchdog Ofgem is going to review how the price cap on gas and electricity bills is calculated as numerous energy companies continue to go out of business.
Ofgem said there has been an “unprecedented” rise in wholesale energy prices, and energy firms are currently unable to pass on the full rise to consumers because of a price cap on household bills.
These rises have prompted a number of firms to collapse in recent months, with a 70% rise in wholesale gas prices in August alone being enough to see numerous companies fail.
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Ofgem will now examine if the price cap reflects the risks facing companies, The BBC reports.
The watchdog said it will “consult on the price cap methodology to ensure it appropriately reflects the costs, risks and uncertainties facing suppliers.”
Ofgem can review the price cap-which is the maximum amount per unit that a supplier can charge households on a standard tariff-twice a year
At the most recent review, the price cap was lifted by 12% to a record £1,277.
In a letter to the energy industry, Ofgem's chief executive Jonathan Brearley, said: “The unprecedented rise in energy prices this year has changed the perception of risk and uncertainty in this market.
“In order to protect the interests of consumers, we must ensure that the regulatory frameworks, including the price cap, fully reflect the costs, risks and uncertainties facing the supply companies we regulate.”
The announcement could see many families hit with higher bills, something which will be a blow to many who will also see their council tax bill rise under Rishi Sunak’s new annual Budget.
Ofgem currently calculates the cap by looking at wholesale gas prices, energy suppliers’ network costs and costs of government policies such as renewable power subsidies.
However, there have been suggestions that this method is not fit for purpose, as it looks backwards to historical prices in order to find the current cap.
This means that is unable to help when rapid changes to wholesale prices, such as the ones seen this year, occur.
Ofgem will launch the consultation in November. A decision on any changes will be published in February, when the new price cap will be announced before it is implemented in April.
