Ofgem explores price cap alternative

The energy regulator is drawing up alternatives to the price cap after admitting it may not be “compatible” with the flexible energy market of the future.

In an open letter to suppliers setting out expectations for the return of competition to the market, Ofgem chief executive Jonathan Brearley said that while the price cap has many benefits for consumers it “also brings some risks and costs”.

He said: “It may also not be compatible with the more flexible energy market we expect in future. We are exploring whether there is an alternative that could retain price protection for consumers but with greater flexibility and resilience, in order to inform any consideration of the future of price cap policy by the government.”

The move was revealed in a wide-ranging letter that also posed the prospect of the market stabilisation charge (MSC) and the ban on acquisition-only tariffs being scrapped.

Both measures were introduced on a temporary basis last April amid soaring wholesale power prices, and then extended earlier this year until March 2024. But Brearley said it was time to “reassess whether risks are now better borne by the market”.

Suppliers are required to pay the MSC to the losing company when they acquire a new customer if wholesale prices fall significantly below the level assumed in the price cap. The ban on acquisition-only tariffs bars suppliers from luring in new customers by offering them exclusive cheaper tariffs that are not available to their existing customer base.

The MSC was triggered for the first time in November last year at £3.56/MWh for gas. It has since been triggered a further 30 times with heights of £23.39/MWh for gas and £73.84 for electricity – both in January of this year. In the last week of June the charge was £0 for gas and £2.07 for electricity.

Brearley’s letter said under current market dynamics Ofgem expected both elements to soon be zero and that “over the coming months we will assess whether the market stabilisation charge is still needed or whether it could be removed for the time being”.

On protections around the so-called “loyalty penalty”, Brearley said: “The ban on acquisition tariffs could have enduring consumer benefits and will limit the loyalty penalty that existed prior to the price cap. But it could also be disincentivising suppliers from offering new tariffs. Therefore, over the coming months Ofgem will reassess its costs and benefits and whether it should be amended or removed in line with our wider work on the future of price protection.”

The letter went on to warn suppliers that Ofgem would be monitoring carefully if its expectations of a return of price competition for customers are being met, warning: “A failure of companies to compete for customers would indicate problems in the retail market that would need to be tackled.”

As a first step, Ofgem is considering whether suppliers should be required to clearly publish all their domestic tariffs to provide transparency.

The letter also reiterated moves to strengthen financial resilience in the sector and the consultation on a new consumer standards framework.

Signing off his public warning to retailers, Brearley said: “As we adapt to this new phase of the gas crisis, a balance must be struck between the need to maintain a resilient sector, and the need to build a well-functioning and competitive market that offers a fair deal to consumers on prices and delivers better service standards.”

‘Fundamental reform needed’

Responding to the letter, Octopus Energy chief executive Greg Jackson said: “Ofgem’s price cap has been critical in protecting consumers in the crisis and ensuring falling costs get passed on to customers. The coming winter could still be challenging and we want Ofgem to keep the price cap as low as possible by resisting pressure to increase it.”

Simon Oscroft, co-founder of So Energy, said: “Fundamental regulatory reform of the retail market is needed to reflect the new normal we now find ourselves in.

“The existing price cap regime is not fit for purpose. The price cap is too unwieldy and inflexible, making it harder for the suppliers left in the market to offer sustainably-priced competitive tariffs.

“There also needs to be permanent protection for those customers most in need. That’s why we are calling for a social tariff to protect the ~10m customers on means tested benefits.

“Alongside this we need Ofgem’s ban on acquisition-only tariffs to remain in place. We need a fair market, and not a market that penalises customer loyalty, and  incentivises suppliers to price cheap teaser tariffs at financially irresponsible levels.”

Jonathan Brearley will be one of the speakers at Utility Week Forum, as our flagship conference returns in October. Find out more here.