Wholesale Energy Prices, Bad Debt and the Price Cap are proving detrimental to Energy Suppliers
- Sep 16, 2021 8:17 am GMT
Seven energy suppliers have exited the market so far in 2021 and more are expected to follow. We look at why suppliers are under so much pressure and the role Ofgem’s energy price cap and policies are playing.
What’s to blame?
We can certainly blame the Covid-19 pandemic and record-high wholesale prices and in some cases poor business models and practices for playing a significant role in those closures, but we also have to consider other factors, ones that aren’t being looked at. Factors like the detrimental impacts of Ofgem’s energy price cap.
In a normal market, prices naturally rise to reflect higher costs and as we are seeing that is certainly happening in the energy market. Except, the prices an energy supplier needs to charge to cover costs is not enough thanks to the energy price cap.
Originally devised by the Labour Party as a way to protect consumers from energy suppliers charging consumers too much the Conservatives under Theresa May adopted it as policy and made it legally enshrined.
Since its introduction, the price cap has been a point of contention for suppliers. Some consumer groups and industry experts argue that instead of protecting consumers it is detrimental to them due to many companies tending to raise their tariffs to match the price cap so that even when wholesale prices do fall those savings are not passed on to the consumer.
Other factors impacting energy suppliers include last year’s announcement by Ofgem that all energy suppliers are required to offer extended payment terms and be more lenient with the collection of debt during the pandemic, something that they have extended to cover this coming winter. As a result of this directive, many suppliers have seen an increase in debt and deficits.
The inflexible price cap
Currently year Ofgem sets the maximum price that can be charged on a standard variable tariff twice a year. Since coming into force energy suppliers have complained that it is too restrictive and does not allow them to react quickly and easily when wholesale energy costs change in either direction.
The price cap rise scheduled for October may be a record high but when compared to what is happening on the wholesale market it will force suppliers to dramatically undercharge their customers.
Although the rise in the level of the price cap is set to increase by £139 from October to reflect rising wholesale costs, bringing the average dual fuel bill to £1,277, this is still over £200 below the cost to supply the energy.
In short, the new price cap increase is less than half the rise in energy costs that suppliers are having to deal with resulting in many companies making a loss and as we’ve seen in the past few days and weeks be forced to exit the market.
When an energy supplier fails it impacts the wider industry. Costs are passed onto other suppliers only adding to their financial burdens. You could argue that businesses going under is just part of business, but when an industry goes from the 70 suppliers that were active just a few years ago to below 50 today something is very wrong.
Large vs smaller energy suppliers
The large energy suppliers like British Gas and Octopus Energy will be able to ride out the tough times thanks to their large customer bases which is why we don’t hear many complaints from them regarding the price cap.
If anything, it could be argued that the price cap favours those larger companies and is designed to punish the smaller ones trying to establish themselves. It stifles the competition to the formerly called the ‘Big Six.’
“In no other sector is the government forcing a loss on the supplier. The cap is fixed like some kind of tablet in stone from God; the market doesn’t work like that. Whether it’s quarterly or monthly; it needs to be calculated more frequently,” said the co-founder of Pure Planet in a recent interview with Bloomberg.
Price cap not fit for the future?
Another complaint regarding the energy price cap is that it is not fit for purpose when it comes to the massive changes in the energy market. For example, the drive towards NetZero has seen a slew of new policies and subsidies that suppliers must adhere to. From renewables obligations to strict tariff structures and billing controls many of the suppliers that have been forced to exit the market in recent years have blamed those costs for them closing.
The price cap meanwhile was simply not designed to consider the planned transformation to domestic heating, the increase in renewable energy sources, the push for all petrol and diesel cars to be replaced by electric vehicles and the infrastructure they require.
It could also be argued that the government and regulator have perhaps taken their eye off the ball when it comes to the energy supply market due to their fixation on green energy, diversity, and climate change. Little has been mentioned about the challenges the industry is facing now especially from government.
One thing is certain, the next few months are going to be some of the most difficult the UK energy supply market has faced in many years. We will have to wait to see whether the regulator and government will take action to help alleviate the challenges.
The energy price cap will rise October 1st and as wholesale prices are expected to remain high throughout the winter the cap is likely to rise further next April.
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