Switching is no longer Ofgem’s ‘holy grail’

Ofgem’s decision to order suppliers to offer all tariffs to existing customers represents a shift from switching being seen as the “holy grail” and a framework encouraging “moral hazard”.

Martin Young, an analyst at Investec, was writing in response to the regulator’s decision on Wednesday (16 February) to temporarily bar suppliers from offering cheaper tariffs to lure in new customers.

Additionally, Ofgem will introduce a Market Stabilisation Charge (MSC) so that suppliers which have purchased energy for their customers in advance are better able to recover more of their costs if there is a “sharp fall” in wholesale prices.

In a briefing note, Young said: “Ofgem has moved from a world where switching was arguably the holy grail and a framework that created moral hazard to a recognition that energy suppliers will be key in achieving net zero and that investor confidence is key.”

He added that the latest interventions, which are effective from 13 April, should reduce the risk for suppliers, particularly if wholesale prices move markedly.

“In isolation, not game changers, but another building block towards a sustainable retail market going forward,” he added.

Young further explained that requiring suppliers to offer all tariffs to all customers will help to reduce the risk of unsustainable competition between retailers as well as help mitigate to some extent against major supplier financial losses leading to significant costs for consumers from disorderly supplier exits.

The MSC will be payable by suppliers gaining new customers to suppliers losing them in the event wholesale prices fall “significantly below” the level used to set the price cap from April.

Young said: “Innovation is needed, and investment is more likely to be forthcoming if investors can have confidence in the retail energy market.

“With numerous references of this ilk throughout the decision document, we are tentatively prepared to say that Ofgem now ‘gets it’, something we consider positive for the likes of Centrica and Good Energy.”

His comments come as the latest switching figures from Electralink revealed January was the third consecutive month in which an historic low was recorded.

An all-time monthly low of 94,000 changes of electricity supplier took place in January of this year – 75% less than in January 2021.

Electralink did however reveal that following the price cap announcement earlier this month, it witnessed a “record level of activity” on its data solutions, a large proportion of which directly translates as price comparison website searches.

Switches started last month similarly fell to an all-time low as all tariffs on offer remain above the current default price cap. In total 117,000 switches were started in January – a year-on-year decrease of 77%.

In terms of switching types:

• Large to large numbered 47,000 – 73% less than January 2021 and 50% of January 2022’s total completed
• Large to other switches totalled 16,000 – 84% less than January 2021 and 17% of January 2022’s total
• Other to large switches landed at 23,000 – 60% less than January 2021 and 24% of January 2022’s total
• Other to other switches numbered 9,000 – 79% less than January 2021 and 10% of January 2022’s total