The government should introduce a “social tariff” guaranteeing cheaper energy to vulnerable users who cannot afford their basic needs, the chief executive of regulator Ofgem has said.

Speaking as Ofgem launched an investigation into energy suppliers imposing prepayment meters on struggling households, Jonathan Brearley said the current high-cost energy market left some households simply unable to pay.

Ofgem’s investigation comes after Business Secretary Grant Shapps wrote to energy suppliers raising concerns over an increase in customers forced to move to prepay meters having fallen behind on regular payments.

Companies could face legal action if Ofgem determines they have moved customers to prepayment without exploring other options to support them.

Mr Brearley said action was needed to address the fundamental problem caused by the tripling of gas prices in the last year.

“There are families that can’t afford to pay their energy bills and we will be active with companies to examine how they deal with those who fall into arrears,” Mr Brearley said.

“But the root cause is that some customers, despite enormous widespread support from the government, don’t have the ability to pay for their basic energy needs.

“We think there’s a case to examine with urgency a social tariff that limits the impact of extremely high prices, which reduces the volatility for a defined set of vulnerable groups.”

Mr Brearley said the tariff would have to be subsidised during periods of high energy prices, and otherwise paid for with “funds raised in a progressive way”, adding that “energy bills are not a progressive tax base”.

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Energy regulator’s prepayment meter worries

His intervention comes after charities called on Chancellor Jeremy Hunt to consider a social tariff to address the growing number of people for whom energy is becoming unaffordable.

Citizens Advice estimates 3.2 million customers were left in cold and dark homes last year after running out of credit.

Mandatory prepayment meters are intended as a last resort for customers who suppliers believe are refusing to pay rather than simply unable and should only be used after exploring the financial help available.

Concerns over spike in prepayment meter warrants

Ofgem says there has been a spike in the number of forced installations or customers being switched via smart metres in recent months.

“I am concerned about the sharp growth in households struggling to pay their bills being switched over to prepayment meters, sometimes without their even knowing about it, leaving them without heating,” Mr Brearley said in a speech at the Institute for Government on Monday.

“I have heard directly from people who have faced poor practice from suppliers. It is simply not acceptable that vulnerable customers are left in the dark and cold in winter.”

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Prepayment meter controversy

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The withdrawal of Russian gas from European supply, increased competition for alternative sources, and a reduction in output from the French nuclear fleet have combined to drive up wholesale gas prices, which effectively set the base rate for electricity production.

While the market has settled since last summer Mr Brearley said there is no prospect of a return to lower prices that were normal before the coronavirus pandemic.

“Mild weather, improved storage in Europe, and a more benign trading environment… has led to a challenging but more robust energy security position,” he said.

“But prices are unlikely to fall back to pre-pandemic levels… we need to be ready for a world where prices are high and volatile.”