Will Ofgem’s latest proposed changes to the energy market actually be good for customers?

This morning Ofgem proposed some changes to the way in which the energy market works. When I first typed this statement I started writing ‘changes to the energy cap’ - I’ll explain in a moment why that would only really tell half the story.

There were proposed changes to the energy price cap announced today. If you asked 100 people in the street I’m confident that most would say that the price cap is the mechanism through which Ofgem regulates the energy market. That’s true, but there are other mechanisms as well, and it was changes in one of those other mechanisms today that is very crucial.

Let’s start with the changes to the price cap that were announced. From the autumn, the price cap will be calculated every 3 months, and the period from the cap being calculated to implemented will be shortened slightly. Ofgem has sold this as protecting consumers. I quote from their press release: ‘Ofgem backs consumers with price cap update’, and ‘today’s proposed change would mean the price cap is more reflective of current market prices and any price falls would be delivered more quickly to consumers’.

This is all true. However…

Not even really mentioned were changes to the ‘Market Stablisation Charge’ (MSC). Those of you who are Formula 1 fans will know that this is the driver abbreviation for Mick Schumacher (and was used for his father Michael as well). This is relevant, I promise you.

So, what is the MSC? It was introduced in April for 6 months. Basically it is a mechanism that requires any supplier who gains customers in a period of falling wholesale prices to pay a charge which is distributed to suppliers who lost customers in that period. It was introduced in April at 75% of the price differential when there has been a greater than 30% fall in the cost of energy. Which right now, is a moot point. The changes were updated to a 10% fall in the cost of energy, and 85% of the price differential.

This sounds technical, and it is. But basically what it means is this - if wholesale prices start falling, and a company launches a profitable (but lower price) tariff and gains customers, it has to pay a big ‘tax’ back to the supplier who lost customers. Which means, you guessed it, that fewer cheap tariffs will be available because, after paying the tax, they won’t be as profitable. Which, as far as I can read it, could basically kill price-based competition in the energy market.

So why have they done this? Well, the reason that Bulb (and others) failed was that they weren’t fully hedged against the exposure of rising energy prices, and they ended up having customers on fixed tariffs where they hadn’t ‘pre-bought’ the right amount of energy to supply them and ended up having to buy it on the open market at higher prices than they were contracted to sell it for - and if you buy high and sell lower, you run out of money. So presumably, if every surviving energy company is fully hedged, then they can’t respond to lower wholesale prices (as they’ve already paid for energy at the hedged price), and so they want to compensate those suppliers for that in the situation where a new or unhedged supplier comes in and takes customers away from them. 

Which begs the question - what’s the point of having a deregulated energy market if you’re going to stifle competition in it by forcing every company to follow the same hedging strategy? At that point, why wouldn’t you just renationalise the whole thing and remove all of the various authorities that have to steward and adjudicate in this faux-race?

I go back to the Formula 1 analogy. My co-founder Greg and I were discussing this this morning when the latest guidance came out. And Greg came up with the idea that this was a bit like having a permanent ‘safety car’ in the race. There’s been some disturbance, and the race is neutralised. There are lots of marshalls to wave flags and technology to enforce the safety car period, which all cost money and create a show of control. We’re now running under the safety car, and it looks like the rules have been updated such that we’re going to be running under the safety car for the foreseeable future. And at that point, are you actually racing? If every F1 race started with the previous race finishing positions and was run under the safety car, would there be any point in having a race or calling it that? Isn’t it just a procession at that point? And why would anyone bother developing their car to go faster?

It may be that this is the logical outcome at this point - to renationalise energy, and to expose customers via one single utility to the underlying commodity price(s). You could then decide politically if that price was too high for any group in society to bear fully, and provide support for those groups on a targeted basis (something we’re already doing in our quasi-privatised current system). 

But there are now so many vested interests in the ecosystem that the government/regulator seems to have settled on pretending that we have a competitive privatised market (so it can blame companies when prices rise), but doesn’t actually want to deal with the costs and risks of proper privatisation anymore - which is that winning companies make lots of money and losers go bust, which is very messy when you have a commodity that makes up a decent percentage of household costs involved. 

We have a situation where providers are allowed to make profit, but competition is very stifled. Time will tell whether these taxes have been set in a way that actually provides any incentive for competitive behaviour, or whether they just lock-in the current market position to the benefit of the current incumbents.

Nous doesn’t have a horse (or a F1 car!) in this race. But we do think that life should be simpler and fairer for customers. This certainly isn’t simple, and probably isn’t fair - for consumers, voters, or for competitors who want to offer lower prices or better service than the current incumbents.

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