The Daily Telegraph
Ofgem is turning to socialism to hide its failure
The regulator’s interventions in the energy market have been disastrous and fuelled the kind of volatility it was meant to avert
If anything sums up the extent to which the energy market is completely broken, surely it’s the latest price cap announcement from Ofgem. Indeed, if the regulator is to be judged against its own mission statement – “to protect energy consumers, especially vulnerable people by ensuring they are treated fairly” – then isn’t it fair to say that it has failed? In a normal world, the news that the price cap on the maximum amount that energy suppliers can charge is set to fall from almost £4,300 to just under £3,330 would mean huge relief for millions of people stuck on basic tariffs.
Yet because the Government’s Energy Price Guarantee is expected to go the other way, from £2,500 to £3,000 in April, the price cap is nothing more than a pointless, theoretical limit. As a result, the typical family faces having to pay another £500 a year to keep the lights on, and their home warm.
Dame Clare Moriarty, boss of Citizens Advice, warns that this will “spell catastrophe for millions of households”, and the number of people who can’t afford their energy bills is likely to double.
At this stage then, isn’t it also fair to ask whether there is any point to Ofgem at all any more, if the only tool it had to fulfil its promise to protect customers was rendered completely ineffective before it had even been unveiled.
The watchdog may protest that it has been sidelined by government policy but that would be disingenuous. The reason the Treasury had to intervene in the first place was because Ofgem dropped the ball. It remained too passive in the face of spiralling energy prices, stood by as Britain’s gas storage facilities became dangerously depleted, and in a botched bid to encourage greater competition allowed the supply market to turn into the Wild West.
The costs of its failure to properly enforce capital requirements on suppliers who had left themselves badly over-stretched in the scramble to sign up customers, are part of the reason why everyone’s bills have gone through the roof.
Now, with Ofgem seemingly out of ideas, the regulator has taken to borrowing those of others by throwing its weight behind calls for social tariffs for those “in the most vulnerable situations”. The feasibility of such a measure should be examined “with urgency”, Ofgem boss Jonathan Brearley says.
Brearley, as ever, is late to the party. Proponents of social tariffs have been growing in number as fears rise about what happens to low income households when government help ends next year.
In January, more than 90 charities and non-profit organisations wrote an open letter to Jeremy Hunt, the Chancellor, calling for a social energy tariff that would provide cheaper gas and electricity for the poorest. MPS including Sir Robert Buckland, the former justice secretary, have also backed the move, and even the boss of UK’S second-largest energy supplier Eon has expressed his support.
But when the person tasked with policing Britain’s energy market jumps on the bandwagon, it is a slippery slope. It goes without saying that advocates of social tariffs are wellintentioned, and it is a terrible indictment of modern Britain that there are people having to choose between eating or heating, or in some cases forgoing both.
It is also true that social tariffs exist in the broadband market and the water industry, but when it comes to energy in particular, Brearley will hopefully be well aware that it is notoriously difficult to implement, which is why there has never been one.
A recent study by University of York academics found multiple problems. One of the biggest is that if a social tariff is subsidised through higher bills, there is a danger that it pushes those close to the cusp into fuel poverty too.
Instead of a social tariff, simply increase social security benefits for pensioner households, those receiving means-tested benefits and people on disability allowance, the report suggests. An even better idea would be for the Exchequer to cover at least some of the cost with the proceeds of the windfall tax.
But the issue isn’t really the merits, or otherwise, of social tariffs to combat fuel poverty. With pressure building, it may yet happen. What is more concerning is that the regulator is calling for social tariffs in the first place. Not content with dictating how much suppliers can charge for energy, which has had a huge impact on the market, it now thinks some customers should be allowed to pay less for their energy than others.
This is the next step down the road to a form of energy socialism, from a regulator whose attempts at intervention have so far been nothing short of disastrous for customers. The wild swings in the price cap it has overseen have helped to fuel the volatility that Ofgem is supposed to shield customers from.
And despite the dramatic reduction this time around, the cap remains too high for customers to benefit. If the average bill reflected the steep falls in wholesale prices of recent months, it would be less than £2,000, research from price comparison site the Energy Shop has found.
At every step the regulator has been far too reactive, and in some cases it has failed to act at all. A more competent market policeman would have anticipated some of the forces that have fuelled the big spike in bills.
Ofgem’s sudden embrace of socialism looks like a vain attempt to deflect from a catalogue of mistakes.
‘The Treasury had to intervene because Ofgem dropped the ball’