Legislation “most effective way” to deliver price cap, says Nolan

Ofgem boss confirms regulator cannot deliver extensive energy price regulation

Ofgem chief executive Dermot Nolan has said that legislation would be “the most effective way” to deliver an extensive cap on energy prices in the UK.

Speaking to the Financial Times, Nolan defended the regulator’s ongoing consultation on the merits of a limited “safeguard tariff” which would extend the price protection currently given to prepayment meter customers to around 2.2m other vulnerable customers.

Ofgem developed this proposal after energy secretary Greg Clark wrote to the regulator, asking it to tell government how it intends to fix a range of concerns about the energy market, including the way the poorest in society are treated.

However, critics have said Ofgem’s proposal does not go far enough, and blasted government for failing to deliver its manifesto commitment to deliver benefits to 17m households by intervening in the energy market.

Nolan insisted that the safeguard tariff proposal is “consistent” with Ofgem’s statutory objectives.

Broader market intervention needs to be a “policy matter for government,” he said, because if Ofgem acted alone to introduce a broad price cap “there would be a substantive appeal route” for energy retailers.

This pitfall in government’s plan to delegate responsibility for its manifesto commitment was pointed out by former energy regulator Stephen Littlechild back in June.

“Ofgem can propose a tariff cap, but a supplier may decline to accept,” he explained.

“In that case Ofgem can ask the CMA [Compeition and Markets Authority] to give it the power to impose a cap. However, the CMA has already given its view. It has considered and explicitly rejected a tariff cap.”

Littlechild concluded: “There are things that Ofgem could do, or undo, to address present concerns. But it is questionable whether imposing a tariff cap is one of them.”

Research conducted by Utility Week, in association with Harris Interactive, found that 51 per cent of consumers support the idea of a whole market energy price cap, versus 24 per cent who favoured the idea of a partial market cap for vulnerable customers.

Should government decide to legislate for an energy price cap, Nolan promised “we would absolutely do our best to implement such a cap as effectively and efficiently as possible”.

The regulator’s chief executive also made it clear that he did not believe all of the recent price rise announcements from energy companies are justifiable.

“I see a situation where wholesale costs . . . are much the same as three years ago and I’m concerned about some of the price rises we’ve seen this year,” he said.

Other issues address by Nolan in his interview with the Financial Times included the challenge of ensuring social equity in a decentralising energy system. He warned that there is a risk that wealthy consumers, able to afford small scale energy generation assets, batteries and electric vehicles, might end up with “very, very low energy costs” because they would not have to pay for network charges or energy policy costs”.

These system costs would then be “smeared over a smaller section of less well off people, including potentially on the vulnerable,” he said.

A solution, suggested Nolan, might be to force off-grid households and businesses who want to maintain grid connections for emergencies to pay something “akin to an insurance premium”.