Global energy markets don’t care who sets prices

Ofgem has this morning had to make the unpopular announcement that it will be lifting the level of the energy price cap by 10% because of increasing wholesale prices and other costs outside of suppliers’ control.

The price cap was introduced to prevent what many political commentators described as ‘unjustified’ price increases. But today’s announcement shows that – whether energy prices are set by Ofgem, local authority owned suppliers, devolved Government backed companies, or ‘big’ or ‘small’ suppliers – unfortunately, there is no magic formula to control rising wholesale costs.

Over the last 6 months, global wholesale costs have increased by nearly 17%. When nearly 40% of a customer’s bill comprises wholesale costs, any significant fluctuations need to be passed through to ensure the price customers pay for their energy is cost-reflective and sustainable. Other costs, like subsidies for renewable energy and the cost of installing smart meters – have been rising too. Ofgem recognised this when implementing the price cap and its design aims to ensure underlying market costs are reviewed, and prices updated, every six months.

As Ofgem’s Chief Executive said today, a higher cap isn’t about suppliers profiteering - far from it - it’s about plugging a cost shortfall to ensure responsible businesses can continue to operate sustainably, provide a quality service, employ people and contribute to the economy. Even with the cap level rising, we expect profits to be significantly lower at 2 - 3p in the pound this year and lower still in 2019/20.

We’ve seen all too often the consequences of suppliers under-charging, offering loss-making tariffs that ultimately can’t be sustained. And sadly, when these suppliers go out of business, it’s the customers of more responsibly run suppliers who are left to pick up the pieces. Last year, 10 suppliers went bust – leaving other customers to pick up a £90m tab.

While we don’t think a price cap is ultimately in customers’ best interests, with an independent third-party like Ofgem setting the cap based on an objective and transparent formula, it gives us the opportunity to have a more informed conversation about energy prices, what’s causing them to increase and what can really be done about it.

While we all work hard to keep costs and prices as low as possible, only a small part of the bill is within the control of suppliers or the regulator and that’s why the cap can go up as well as down. The most sustainable way to keep bills in check is to help customers take control of their energy usage through the smart meter roll-out and by investing in making the UK’s housing stock more efficient. We’re busy getting on with both.