It's called a circumflex in English and a to bach "little roof" in Welsh. It shows that the vowel is long.
For example, gwyn "white" has a short y sound and gwŷn "pain" has a long y sound, so the presence or absence of the mark is significant.
There's no word pel with a short e as far as I know, but pêl is still spelled with a to bach to show the vowel is long when that might not be expected.
As far as I know, its use is standard in Welsh writing (i.e. leaving it off is incorrect, strictly speaking). But vowels with a circumflex don't have a separate place in the alphabet.