Penrose: We need to take a long, hard look at auto-switching

As part of the Energy Reset campaign, Utility Week speaks to the MP who spearheaded calls for an energy price cap. John Penrose discusses his vision for the cap, his fear of of losing the “dynamism” now inherent in the retail market, why green levies should be phased out "not moved around" and that the future of auto-switching needs “careful consideration” in the light of recent events.

John Penrose has never shied away from criticism of energy retailers and their regulator.

However, the man who led the Parliamentary charge towards the price cap tells Utility Week the reforms he would like to push through are in the interest of energy companies as well.

We are talking on the back of a speech delivered by the MP for Weston-super-Mare last week, in which he revived his argument that the model chosen for the energy price cap was the wrong one.

He tells Utility Week that the current turmoil in the retail market presents an opportunity to put this right. He believes his model of the cap would allow retailers to hedge more accurately, protect both new and existing customers and could render the government’s auto-switching proposals largely irrelevant.

While his focus is on long-term realignment of the cap, he stresses that for ministers the priority is ensuring security of supply. He accepts it is inevitable that the next price cap review will see a rise to reflect the recent spikes in gas prices. However, he also wants government to commit now to act when the costs to suppliers eventually begin to fall.

“The market is not currently behaving as it normally would but if the wholesale prices start to fall quite fast at any point during the Spring, there should be an earlier review of the price cap than just waiting for the normal six months.”

Re-cap

The model Penrose has long advocated for is a relative price cap, in which a maximum mark-up is set between a supplier’s best competitive price and their default tariff. He argues that this would still give customers an incentive to switch but, crucially, would protect those who either chose to stay with their current supplier or neglected to switch.

In his Beesley Lecture he admitted that the current absolute version of the price cap had provided a safety net for customers in the face of soaring wholesale gas prices but said this was a case of the cap fitting in one out of 99 months rather than a mark of wider success. He has now updated his proposal to include what he describes as an “emergency circuit breaker” which would set an absolute cap set if prices rise or fall sharply in a set period of time.

Speaking to Utility Week, he explains: “I envisage having a pre-set trigger, so if the wholesale price moves by more than X% in Y days then the regulator would act.

“Having that preset trigger would give certainty to everyone in their planning and it means Ofgem knows what its job is and when it has got to do it.

“The other advantage is that  by making it a pre-set trigger, it makes it hedgeable because Everyone knows what they’re facing.”

He points out there is now a live example of a relative price cap in the insurance market, where the FCA has introduced rules to end the practice of “price walking”.

While he is keen for Ofgem to follow the FCA’s lead on this point , he is wary about suggestions that it should go for a full-throated prudential regulation model for retailers. Last month the regulator’s former chief executive Dermot Nolan told Utility Week that while he had always sought to avoid such onerous oversight of the market, it may be necessary given the evident failure of some companies to hedge properly.

Penrose says: “It will depend on looking back on this period and seeing what the Supplier of Last Resort costs end up being and who ends up paying. If it’s mainly shareholders in the companies that have gone bust then that’s perfectly fair enough.

“If it turns out those costs are being borne by other people, not just the shareholders, then you may have a case

“But, we also need to worry about the extra costs of prudential regulation. It’s not a cheap thing to do. It’s not just the cost of giving the regulator the resources to do this, it’s also the conditional opportunity costs to the competitiveness and the efficiency of energy. Ultimately those are borne by consumers as well.”

The market was becoming more dynamic

While he has been a vocal critic of retailers in the past, Penrose believes there have been positive changes which should be recognized. In particular, he praises the level of competition and the choice available to customers.

He adds: “We are seeing a difficult shake-out at the moment but up until this point, there is no doubt the market had got a great deal more dynamic, more competitive and has given consumers a lot more options.

“The fact that the big six are no longer the big six and the largest suppliers now include some firms that weren’t even formed a decade ago shows how much it has changed.

“I’d hate for that to be lost as a result of what is going on at the moment. What we need to aim for is something which is a little simpler, a little less Wild West but which is just as efficient and dynamic and just as full of exciting, entrepreneurial new entrants.”

Utility Week’s Energy Reset campaign calls for the government to re-orientate its strategy for energy retail to reflect that relationships with consumers are changing and that we are likely to move away from a commodities model and towards one based around services.

Penrose agrees that this is one possible route but cautions that there is a “long, and not particularly distinguished, history of politicians thinking they know the direction of travel” for the energy sector.

He advises against taking “big bets” and instead focusing on no-regrets options, many of which he believes are included in Dieter Helm’s Cost of Energy Review. And, of course, there is his own proposals for the price cap.

He stresses: “ If you have an overhauled price cap of the type I have been suggesting, people will still be able to switch and they can do that in a world where suppliers are offering different things. So whether you’re interested in a premium level of boiler service or just a cheap and cheerful supplier.

“Remember, we switch service providers in other things too. Just because it’s a service doesn’t mean people won’t want to switch.”

Asked whether auto-switching, currently the cornerstone of the government’s energy retail strategy, remains fit for purpose in the context of recent events, he says: “Clearly we are going to need to take a long, hard look at auto-switching in the light of what is happening.

“We need to ask ourselves, would this (auto-switching) really have worked if it had been widespread when the market started behaving in this unusual way. It needs careful reconsideration because we now have new information.”

Returning, once again, to his proposals for the price cap, he says: “If we moved to the new version of the cap, auto-switching would become much less of an issue.”

Another key ask of the Energy Reset campaign is to move green levies away from energy bills and into general taxation. The Department for Business, Energy & Industrial Strategy is instead understood to be considering shifting some of these costs from electricity to gas.

However, Penrose suggests: “Money is very tight for everyone so more tax rises would be difficult for anyone to stomach.

“We should be looking at ways to phase out the green levies, not move them around. This is a policy that has actually worked. We’ve got renewables coming on stream. They’re a heck of a lot cheaper than they were so let’s try to level up by making prices come down. You can’t do it overnight but you can start the process.”

Find out more about Utility Week‘s Energy Reset campaign here.