Energy retail market ‘overly focused on the short term’

The make-up of the price cap is leading energy suppliers to be “overly focused on the short-term”, which is preventing consumers from being offered longer-term benefits.

The government has warned that the cap’s current model “could act as barrier to innovation”, in a series of documents published by the Department for Energy Security and Net Zero which outline the government’s plans to strengthen the energy retail market.

The main document, which outlines the government’s overall strategy, stresses the need to strike the right balance between competition and regulation.

It explained how the government is expecting greater competition between suppliers than it has seen in recent years and that it wants to see “sustainable competition being the primary driver of good outcomes for the majority of consumers”. Where possible, it added, the government will remove regulatory barriers to competition that are not in consumers’ interests.

It highlighted how the default tariff cap has “performed a valuable role” in reducing bills, incentivising retailers to make operational efficiencies, as well as helping the government to deliver timely support.

It added: “However, the incentives for suppliers to follow the hedging strategy underpinning Ofgem’s price cap methodology have contributed to a retail market which is overly focused on the short-term.

“Looking forward, the risks and opportunities facing energy consumers are changing. The current cap model could act as barrier to innovation and engagement, and prevent consumers from feeling the full benefits of the transition to a smarter, more flexible energy system.

“Government looks forward to continued engagement with the sector on this issue and remains committed to consulting on the future of the default tariff cap.”

A call for evidence published within the series of documents seeks to address the barriers to innovation.

It argues that the retail market in its current form is not supporting the change needed to ensure the market works better for consumers, is more resilient and investable and supports wider system transformation.

While acknowledging there has been some business-led innovation, such as the introduction of ‘Time of Use’ tariffs and bundling – where additional products or services are sold to consumers as part of their energy supply – these are currently limited to a “small subset of the market”.

As such the government is seeking views on the barriers and enablers to innovation, as well as the changes to the policy and regulatory framework that may be needed.

A second call for evidence seeks to further the government’s understanding of domestic consumers who receive their energy via a non-domestic contract to help establish whether these consumers need any longer-term protections.

Some of the key differences between domestic and non-domestic contracts include the fact that domestic contracts allow consumers to switch suppliers whenever they want, whereas customers on a non-domestic contract do not have this option. Additionally, domestic contracts have a cooling off period, non-domestic energy contracts do not.

Furthermore, domestic consumers with non-domestic supply contracts have had a different level of protection to regular domestic customers, the latter of which have had the price cap and Energy Price Guarantee to shield them from soaring bills.

Elsewhere the paper made the case for targeted support for low-income and vulnerable consumers to be delivered in a way that aligns fully with the government’s approach to fuel poverty, while at the same time “being responsive to short-term changes in the energy market when necessary”.

It added: “We are undertaking a review of the fuel poverty strategy and will use this to develop a clear and coordinated approach to affordability, fuel poverty, and wider retail market reforms. We will also look at options, including making the Warm Home Discount more flexible, in order to give us greater ability to respond to any future pressure on consumer bills.”

Commenting on the announcement Amanda Solloway, minister for energy consumers and affordability, said: “Over the winter, we provided unprecedented levels of support – including paying nearly half a typical household’s energy bill – and took decisive steps to stabilise the retail market.

“We now want to put power back in the hands of consumers, giving them greater options to cut their energy bills in a market fit for the future. Today, I’m calling on industry to work with us, and take up the opportunities of investing in low-carbon technologies and providing a first-class customer service.”