Wholesale energy market needs ‘wholesale reform’

The wholesale energy market requires “wholesale reform” and reliance on gas spot markets to set energy prices is “clearly bonkers”, one of the leading campaigners for an energy price cap has told Utility Week.

In an interview conducted last week, Conservative John Penrose MP urged a “fundamental reset and rethink” of the wholesale energy market.

The MP for Weston-Super-Mare was a prominent voice in the campaign, which culminated in the decision by former prime minister Theresa May’s government to establish a price cap on standard variable tariffs.

Penrose advocated the establishment of a relative cap on default tariffs, which would be set by each supplier six per cent above the cheapest rate they offer.

This week energy minister told The Times newspaper that the energy price cap is “here to stay” but any extension beyond the end of 2023 will require fresh legislation.

Penrose told Utility Week that he continues to support the relative cap, which he said would protect customers against excessive standard variable tariffs while giving them scope to seek out cheaper deals, but that it could only be part of the overall solution for fixing the energy market.

He said a “wholesale reform of wholesale energy” is required.

This would involve a “fundamental reset and rethink” of the existing electricity trading market’s reliance on high marginal pricing, often set by expensive gas peaking plants.

Penrose said the reliance on gas spot market prices does not reflect the increasing proportion of generation supplied by renewable and generally cheaper sources of electricity.

He said: “The problem at the moment is that if you are running a wind farm your costs haven’t changed in the last couple of years and may have come down as you optimise and invest in it, yet the price you are able to sell energy at has gone through the roof.

“The reason is that wholesale market works off the wholesale market for gas, which is clearly bonkers for all other kinds of energy where costs haven’t changed in quite the same way.”