Ofgem’s chief executive has said he would review the way Britain’s energy price cap works as rises in wholesale gas prices have left customers facing a sharp increase in bills.
Jonathan Brearley said the regulator would also increase scrutiny of the business models of energy suppliers following the collapse of 10 companies, with 1.7m customers, in recent months. He told a conference on Thursday that the surge in gas prices had made clear that Ofgem needed to “go further” with its regulation of the market.
“Although the gas price rise is unprecedented today, we will need to plan on the basis that shocks like this could happen again,” Brearley told the conference in London organised by trade body Energy UK.
He said that would involve an examination of the consequences of the crisis for the “wider design and implementation” of the energy price cap that was only introduced in 2019. It would also mean an “approach to regulation that is more focused on the business models that enter and operate in our energy market and on the risks that they carry”, he added.
Ofgem’s supervision of Britain’s energy retail market has been criticised by many larger energy companies and analysts who said they warned the regulator about the fragility of the market and the dubious business practices of some companies long before the unprecedented surge in wholesale gas prices.
A decade ago Britain’s retail market was dominated by what was referred to as the Big Six companies. But reforms led to rapid growth in new entrants in the past decade, with the number of suppliers peaking at about 70 in 2018. There were 50 at the end of March, according to Ofgem data.
Some suppliers have been calling for an adjustment to the way the price cap is designed so they are able to pass on wholesale price rises to customers sooner. At present, it is reviewed twice a year and there is a lag of three to eight months in the wholesale prices that are used to calculate the level of the cap.
Doug Stewart, chief executive of GEUK, a niche green energy supplier, told the Financial Times the current design of the price cap was “perverse” because it was asking the industry to provide “bridge finance”.
Some companies have pressed for its removal entirely but Brearley insisted the cap had played an important part in “mitigating the consequences of the current gas price rises today” for households.
He alluded to further price rises early next year following the next review of the cap as it would “need to adjust over time to reflect the changes in fuel prices that we are seeing today”.
The consultancy Cornwall Insight has calculated the main price cap could jump by 30 per cent from April to about £1,660. Other analysts have warned of an even bigger increase without government intervention.
Ofgem tightened up the rules for new entrants in 2019 and last year toughened the regulation of existing suppliers. Dermot Nolan, who was replaced by Brearley as head of Ofgem in February 2020, admitted last week that the regulator should have introduced tougher measures earlier.
Brearley said he knew the regulator needed to “move at pace” in response to the crisis, although he insisted that there was a “balance to be struck” in the regulation of the market so that the industry maintains a “diverse set of suppliers”.
Kwasi Kwarteng, the UK business secretary, repeated assurances that the country’s energy supplies would be sufficient this winter. He told the same conference that longer term, the government’s push to decarbonise the power sector by 2035 would reduce the country’s dependence on volatile fossil fuel prices.
Ofgem hints at UK energy price cap reform and tighter regulation of suppliers
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