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OFGEM moving to quarterly price cap reviews - confirmed

GingerTim
GingerTim Posts: 2,301 Forumite
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edited 4 August 2022 at 7:43AM in Energy
The head of OFGEM has just said on Radio 4 that the next review of the price cap after October will be January 2023, and quarterly thereafter.

He also said they are 'looking at the standing charge'.
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Comments

  • MattMattMattUK
    MattMattMattUK Posts: 10,152 Forumite
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    Overall it makes sense as it will mean that the cap is more reactive to the wholesale price, however I suspect there will be some who dislike the uncertainty of it lasting three months rather than six. 
  • k_man
    k_man Posts: 1,636 Forumite
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    If the cap is reviewed too frequently, doesn't this then just become a tracking rate, following the wholesale rollercoaster pricing?

    Doesn't this also lead to the winter cap being based on summer/autumn prices?
  • One of the many problems with the present Cap is that it looks backwards. In a dynamic situation of upward energy prices, suppliers end up subsidising customers on an Ofgem Capped Tariff. A quarterly review will just reduce supplier losses, and it may stop other suppliers going to the Wall. That said, the whole methodology underpinning the Cap needs to be reviewed to include an element of forward forecasting.

    From the recent BEIS Select Committee Report on Energy:

    However, we found agreement on both sides of the debate that the price cap was not designed to cope with price volatility and contributed to recent market instability.363

    As the price cap is only revised every six months, it created a lag in suppliers’ ability to pass wholesale cost increases on to customers, and in turn, exacerbated suppliers’ vulnerability to external shocks. Energy UK stated that despite the price cap increasing by 12% in October 2021 (to £1,277), suppliers were subsidising customers on default tariffs, sometimes by as much as £700 per customer.364 Ofgem acknowledged that the design of the price cap forced suppliers to subsidise customers in response to wholesale price increases. It explained:

    The cap’s methodology has meant it has protected an increasing number of customers—around an extra 7 million since its introduction—from the full extent of the price increases and the costs suppliers face. But this has placed a strain on suppliers–exposing them to hard to manage risks and costs not specifically accounted for in the cap.365

    128. Dermot Nolan, former CEO, Ofgem, who oversaw the design of the price cap regretted not including provisions to update it more regularly.366 He accepted that this would have avoided some of the mutualised costs customers are now experiencing.367 He conceded that, “ there was “a failure of imagination on my part in that regard”.368 When we pressed Mr Nolan on why the design of the price cap did not provide any headroom for the risk of shocks to the wholesale market, he said:

    [..] I must confess that I do not regret this, there was a conscious choice to make a tougher price cap. Yes, there were immense amounts of discussion within the Board about that particular issue. We were conscious that we were going to reduce profitability in the industry. The Board took the view that that was the right thing to do. It took that view because the alternative would have been, frankly, higher prices almost indefinitely. One thing we found within our analysis of the bigger companies during the price cap was how inefficient they were compared to some of the smaller companies. We made a conscious decision to reduce the profitability of the sector.369


    As you can see from the above, Ofgem wanted to reduce supplier profitability but whilst it recognised the risks associated with market instability, it chose to ignore them. Look at how that has worked out for consumers.
  • MattMattMattUK
    MattMattMattUK Posts: 10,152 Forumite
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    k_man said:
    If the cap is reviewed too frequently, doesn't this then just become a tracking rate, following the wholesale rollercoaster pricing?
    Trackers are usually a lot more volatile than three months. The cap was never designed for these circumstances though, it is really just a very laggy tracker at the moment. 
    k_man said:
    Doesn't this also lead to the winter cap being based on summer/autumn prices?
    The wholesale price is not the spot price, it includes futures. 
  • Mstty
    Mstty Posts: 4,209 Forumite
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    I am undecided until we see it in action and how quickly it is able to react to increases and decreases in the market.

    Sounds like our local petrol station it takes them 3 months to react because they sell so little they probably only get 2 deliveries every 3 months.
  • MWT
    MWT Posts: 9,628 Forumite
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    edited 4 August 2022 at 9:11AM
    k_man said:
    Doesn't this also lead to the winter cap being based on summer/autumn prices?
    They are incorporating the wholesale future pricing for the next cap period in the calculations, so they are approximating the real cost of hedging the supply required for the period to come...
    The risk is in the gap between what has been hedged and what happens to the day-ahead pricing for the energy required to fill that gap...
    Clearly if a supplier chooses not to hedge then they become highly sensitive to the day-ahead pricing and we saw how that works out last year...
    This is also why it is proving difficult to get anyone to take on the Bulb customers, as Bulb has no hedging in place...
  • badmemory
    badmemory Posts: 9,063 Forumite
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    Nice to know the suppliers are being protected at our expense.  What do they say - nothing new under heaven, except this is turning out to be more like hell.  Margaret Thatcher has a lot to answer for.  Wouldn't it be nice to have a fraction of their extra profits.
  • badmemory
    badmemory Posts: 9,063 Forumite
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    GingerTim said:

    He also said they are 'looking at the standing charge'.

    So that is going up again.  They may be implying it is going down to fool us all but in reality it will be going up
  • MWT
    MWT Posts: 9,628 Forumite
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    badmemory said:
    Nice to know the suppliers are being protected at our expense.  What do they say - nothing new under heaven, except this is turning out to be more like hell.  Margaret Thatcher has a lot to answer for.  Wouldn't it be nice to have a fraction of their extra profits.
    Don't confuse the suppliers with the producers, if the suppliers were making lots of profit we wouldn't have seen so many failing over the last year...

  • badmemory said:
    Nice to know the suppliers are being protected at our expense.  What do they say - nothing new under heaven, except this is turning out to be more like hell.  Margaret Thatcher has a lot to answer for.  Wouldn't it be nice to have a fraction of their extra profits.
    If the Government nationalised energy supply tomorrow it would cost the taxpayer £Bns in compensation. Moreover, where would a nationalised supplier get its energy from? It would still come from international producers such as Shell; BP and Centrica all of whom would continue to charge at the World market rate. 

    One of the problems last Winter was LNG. LNG tankers turned East for China rather than West for the UK because China was prepared to pay above market prices.
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