Ofgem proposes to extend market stabilisation charge

Ofgem has proposed to extend its market stabilisation charge and ban on acquisition-only tariffs until the end of March 2023.

The temporary measures, which came into effect in mid-April, were introduced by the regulator in response to the massive surge in gas and electricity since last autumn. Both are currently set to expire at the end of September.

The measures are intended ensure that prudently hedged suppliers are not penalised by being undercut by rivals if wholesale prices fall sharply.

Suppliers are required to pay the market stabilisation charge to the losing company when they acquire a new customer, but only 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 measures were approved by Ofgem in February, and in May, the regulator altered the parameters for the market stabilisation charge to make it stronger and more easily triggered. It is now consulting extending both measures for a period six months.

Ofgem said the issues they intend to address are likely to remain throughout the extension period, with the risks being comparable to or even greater than those present when they were approved in February.

The regulator quantified these risks using the measure of “value at risk”, representing the estimated value of energy purchased in advanced to serve all domestic customers on standard variable tariffs minus the value that energy would have if prices fell back to typical historic levels.

At the time of its February decision, Ofgem forecast the value at risk per domestic customer once the charge came into effect in April at £438. Upon updating the parameters of the charge in May, the regulator put the figure at £657.

It now expects value at risk per customer to hit £636 in July, before rising to £812 in October. It then expects the figure to fall to £620 in January 2023 and £377 in March 2023.

Back in February, Ofgem noted that reforms to the price cap methodology and other initiatives should eventually reduce the need for the market stabilisation charge. Although that is still the case, the regulator said the necessary phasing means much of the effect of these changes will not emerge before January 2023.

In its February decision, Ofgem also said there may be a case for tapering down the parameters of the charge to smooth the way to its full removal. The regulator said its analysis suggests that such tapering will be premature before January 2023 but added that it will return to the issue at a later date.

The deadline for responses to the consultation is 18 July.