Energy bills risk being inflated by penalties for cheaper tariffs
‘This reform could lock people in or reduce the cost savings from switching, but the issue is bigger than this’
HOUSEHOLD energy bills could stay high even when gas prices drop under plans by the energy regulator to extend a scheme that penalises companies offering cheap tariffs.
Energy companies will have to pay households’ existing suppliers if they want to offer them cheaper tariffs when wholesale prices fall, under new rules brought in by Ofgem.
The change has been criticised as a “terrible” deal for millions of households struggling with the cost of living. Soaring global wholesale prices have pushed the energy price cap to nearly £2,000 last month, a 54 per cent rise, and are expected to lead to another spike in October.
Ofgem’s policy runs until September, but the regulator is considering extending it indefinitely, a move that consumer groups say could lead to permanently high prices.
“Essentially, it will make it quite unlikely that prices would actually drop much, even if wholesale prices dropped. It’d be difficult for consumers to find huge savings out there,” said Richard Hall, an energy expert at Citizens’ Advice.
“Our research shows around five million people already can’t afford April’s price increase of £60 a month,” said Mr Hall. “So if wholesale prices were to fall away, but consumer choices weren’t seeing those kinds of deductions being reflected, that could be a terrible outcome for millions of households.”
He added that the charity has “some concerns that it could become more of a permanent measure”.
The policy is designed to stop energy companies who have bought in advance at high prices being unable to recoup their costs, increasing their chances of going bust, at a cost to taxpayers.
Nearly 30 companies have collapsed since the energy crisis caused wholesale prices to rise, leaving taxpayers to foot a predicted £3.2billion bill.
Some £2.2 billion of that will be needed to cover the fallout from the collapse of Bulb, which eschewed the practices of bigger energy firms to buy sufficient gas and electricity for its customers in advance, leaving them vulnerable as wholesale prices rocketed.
With its new policy, Ofgem wants to disincentivise companies from buying energy in the short term and instead build up sufficient supply to cover it for months, and to stop them going bust.
But the regulator’s own assessment finds that the benefits to consumers of being able to save money are likely to outweigh the potential cost of suppliers going bust. Customers will lose out on an estimated £1.1bn to £1.5bn of cheaper deals, while the policy will protect against potential costs if suppliers did go bust of £1.2bn, Ofgem estimates.
Simon Francis, co-ordinator of the End Fuel Poverty Coalition, said: “Ofgem is seeking to make the energy market even more complex with pricing structures which may punish switching in the future.
“At the moment it is a moot point with the market stagnant in the face of the energy bills crisis. But the fact this reform is needed is symbolic of the failure of a consumer energy system built on switching, which is costly for energy firms and inflates prices as customer acquisition drives up bills. As Citizens Advice suggests, this reform could lock people in or reduce the cost savings from switching, but the issue is bigger than this. We need to use this period instead to consider if the current market model works at all for low income and vulnerable households.”
A spokesman for Energy UK said: “After a period of huge upheaval for the retail sector with nearly 30 suppliers having exited the market since August – and the resulting costs expected to add £2.4billion to customer bills – we support Ofgem’s attempts to ensure greater stability going forward.”
An Ofgem spokesman said: “Our top priority is to protect consumers. Against a backdrop of continuing difficult market conditions, it is crucial we make sure that the innovative short-term measures we are putting in place are effective enough to keep the market fair and stable.”