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Ofgem protects energy market at expense of consumer affordability

© ShutterstockWoman At Home Boiling Kettle For Hot Drink With Smart Energy Meter In Foreground
Woman At Home Boiling Kettle For Hot Drink With Smart Energy Meter In Foreground

The energy regulator Ofgem has published a decision document on the Market Stabilisation Charge (MSC) and opened a fresh consultation on changes to the frequency of energy price cap adjustments. These changes, while identified by the regulator as crucial to protect the market, risk having an adverse impact on consumers – something Ofgem concede in their own documentation.

In April 2022, a Market Stabilisation Charge (MSC) was introduced as a temporary measure to help secure the UK energy market. Two parameters were set: a threshold that limits the amount providers can set their tariffs at below the wholesale element of the price cap and a derating factor that sets the percentage of incremental hedging losses incurred by a nominal supplier covered by the MSC.

These parameters were initially set at 30% and 75%. In practice, this meant consumers had the possibility of accessing tariffs up to 30% cheaper than the cap before the MSC would be triggered. However, following further consultation, the parameters of the MSC have been changed to 10% and 85%. Furthermore, the period the temporary MSC will be in place for is set to be extended to the end of March 2023, an increase of six months.

On the surface, these are technical changes that consumers won’t generally pay attention to, but they signal a level of market control that stops suppliers pricing their energy at a level the regulator deems to be uncompetitive. It’s only a marginal comfort to recognise the situation could have been worse: several stakeholders wanted a threshold of 0% and a derating factor of 100%.

Ofgem’s desire to protect the energy market from further shocks is a laudable aim and, some would argue, woefully late. They cite the need to avoid unplanned or disorderly market exits when dozens of suppliers have already collapsed and the introduction of a MSC now may simply have the effect of stifling consumer engagement with the energy market. Once that engagement is lost and consumers begin to believe that all suppliers are offering the same things, the market for domestic energy effectively becomes defunct. As some stakeholder responses pointed out, the incentive to switch could be lost and a strengthened MSC could create an oligopoly.

In their response to stakeholder concerns, Ofgem explicitly admit they are putting supplier stabilisation above the hardships currently faced by energy consumers across the country. Their justification is that pricing must allow for the efficient costs of providing energy to be recovered by suppliers. Again, this is a crucial component of a functioning energy market, and it would be foolhardy for any suppliers to try and game the current crisis by drastically undercutting the cap to attract customers.

Yet it’s worth reiterating that dozens of energy suppliers have already collapsed. While Ofgem has powers to check on the financial health of providers, those powers have either been ignored so far or not used to their full impact. It could be more beneficial for Ofgem to ensure suppliers are operating within their financial parameters rather than imposing a sector wide MSC that threatens to have wider impact.

© Supplied by Choose.co.uk
Lyndsey Burton, managing director of Choose.co.uk

Turning to the consultation on increasing the regularity of the energy price cap recalculation, we again see Ofgem conceding that they are ignoring warnings of consumer harm.

The current energy price cap level is amended twice a year, with the changes affecting customer bills from April and October. Under the new proposals, which Ofgem are minded to proceed with, the cap would be amended four times a year in January, April, July and October. The notice period for the cap to change would also be reduced to 25 working days, ensuring the decision on the cap level would be taken close to the cap itself coming into force. These changes would ensure that the cap level can be more dynamic and react to wholesale volatility, making sure energy providers can cover the costs of supplying energy to consumers. Once again, this protects the energy market and limits the possibility of suppliers’ finances being stretched too far.

However, what’s good for the energy market isn’t necessarily good for the energy consumer. While the default energy price cap was introduced to limit the amount suppliers could charge customers who were not on fixed deals, it had the secondary effect of allowing customers to know the maximum they would be charged for their energy over a six-month period. Amid the chaos of the energy crisis towards the end of 2021 and into 2022, customers at least knew their bills would be capped until 31 March. Given household pressures over the winter months, this certainty was valuable.

Under Ofgem’s new proposals, this certainty would vanish and customers would expect to see a change to their bills (for argument’s sake, let’s say an increase) in January, with notification for the change coming at the end of November. This timing has several risks, acknowledged by Ofgem themselves in their consultation.

Stakeholders to their previous consultation on the issue raised the prospect of households struggling with budgeting and forecasting expenditure due to more frequent changes in their energy bills. This issue is more acute over the winter period, with stakeholders mentioning concerns about self-rationing or difficulty paying for increased bills in January following Christmas expenditure. There was also a concern that engagement around this period would be low, with customers missing the notifications and therefore being unaware that their bills were about to jump.

Ofgem’s own consumer research found that customers wanted stability and certainty around the number of price changes and the size of them. They then admitted that frequency and potential volatility is a logical consequence of the switch to quarterly updates. However, their conclusion was that quarterly updates remained the best option to strike the balance of risks between customers and suppliers.

With Ofgem’s consultation on changes to the price cap period open until next month, there is a possibility their stance could alter in the face of fierce feedback. However, this seems unlikely given that they have publicly stated they are minded to go ahead and have disregarded warnings of consumer harm within the responses to their own prior consultation. For customers, this means extra uncertainty around the price of their energy bills, even if the proposals manage to achieve their stated aim of protecting the market.

Ofgem aim to balance the needs of energy suppliers and energy customers through their regulatory levers. On this occasion, the balance has been tipped towards protecting the market at the expense of consumers in relation to both the MSC and the proposed amendments to the energy price cap. If these changes are allowed to settle into the market unopposed, there’s every chance that frustrated and angry customers will not only be left unable to find better deals in the medium term but also disillusion with the very idea of an energy market.

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