Addressing mounting fears over the impact of wholesale power price spikes on energy retailers back in September, Kwasi Kwarteng was sanguine. “It is not unusual for smaller energy suppliers to exit the market”, the energy secretary told the Commons.
However, what we have seen heading into this winter is anything but usual. As one industry observer tells Utility Week: “A few years ago you could pretty much predict the companies that would go to the wall. They had entered the market with an unsustainable business model and quickly got found out. Now everyone but the biggest players are vulnerable, and even they’re taking a massive hit.
“What we’re seeing at the moment isn’t necessarily about unsustainable business models, it’s about an unsustainable market.”
As part of our Energy Reset campaign, Utility Week is looking for the green shoots of reform to emerge out of the current turmoil.
However, so far there seems little appetite from the government or Ofgem for radical action to stem the flow of supplier failures.
The mantra from both sides is that existing safety nets are holding and consumers are protected by the price cap.
While this is true in the short-term, consumers will ultimately pay the price with a cap rise in April set to reflect the impact of soaring wholesale prices, as well as the costs resulting from the Supplier of Last Resort process.
For Pure Planet founder Steven Day, whose business collapsed in mid-October, it is “illogical” that the government would not support energy retailers when it appears ready to leap to the defence of other industries
hit by the fallout of price hikes.
He tells Utility Week his business was “caught in the crossfire” of a volatile global market and “dysfunctional domestic policy”. He says there was a “massive asymmetry” in the way regulation was being applied in that “only consumers are protected on variable tariffs but the supply base is not, industry is not, business is not”.
In the announcement revealing the failure of Pure Planet, after backers BP withdrew support, Day and his co-founders warned
that more suppliers will go under if help is not made available.
They said: “Kwasi Kwarteng says the price cap is non-negotiable. Fair enough. But that doesn’t mean helping supply companies needs to be non-negotiable too. If he doesn’t act fast, he’ll have no suppliers leftto be minister of.”
It’s all relative So, if there was to be negotiation on the price cap, what would it centre on?
John Penrose, the MP who led calls for the cap to be introduced, has long argued that the wrong model was chosen at the time. He tells Utility Week that now is the perfect time to adopt a formula that works for both suppliers and the public.
The model Penrose advocates is a relative price cap, in which a maximum mark-up is set between a supplier’s best competitive price and their default tariff. He argues that this would still give customers an incentive to switch but, crucially, would protect those who either chose to stay with their current supplier or neglected to switch.
He admits that the current absolute version of the price cap has provided a safety net for customers in the face of ballooning wholesale gas prices but says this is a case of the cap fitting in 1 out of 99 months rather than a mark of wider success. He has now updated his proposal to include what he describes as an “emergency circuit breaker”, which sets an absolute cap set if prices rise or fall sharply in a set period of time.
Speaking to Utility Week, he explains: “I envisage having a pre-set trigger, so if the wholesale price moves by more than X percent in Y days then the regulator would act.
“Having that pre-set trigger would give certainty to everyone in their planning and it means Ofgem knows what its job is and when it has got to do it.
“The other advantage is that by making it a pre-set trigger, it makes it hedgeable because everyone knows what they’re facing.”
He points out there is now a live example of a relative price cap in the insurance market, where the Financial Conduct Authority (FCA) has introduced rules to end the practice of “price walking”.
While he is keen for Ofgem to follow the FCA’s lead on this point, he is wary about suggestions that it should go for a fullthroated prudential regulation model for retailers.
Speaking to Utility Week in late September, former Ofgem chief executive Dermot Nolan said that while he had always sought
to avoid such onerous oversight of the market, it may be necessary given the evident failure of some companies to hedge properly.
He said: “I have huge sympathies for the workers and the customers of these failed suppliers but, as an owner, if you have committed to a fixed tariffand you haven’t hedged accordingly, then you don’t really have any right to complain.
“The question is, going forward, should the regulator and government get very specific about risk? Maybe we should have done that in the past – there are pros and cons to that.”
He said that if such a move was deemed necessary it would be “quite a step” and might require a “substantial increase in Ofgem’s size”. As an example, he pointed to the FCA’s headcount of c4,000 versus Ofgem’s c1,200 employees.
He said: “That level of scrutiny would be very resource intensive. But maybe it’s necessary.”