Does the cap help or has it exacerbated the crisis?

ariarnia

EssexHebridean said:

macman said:

ChaunceyGardiner said:

Michael said:

The cap has helped make the UK energy market 'fairer', preventing those who are too lazy to shop around from being fleeced for their laziness.

That's rather unfair. Plenty of people are not in a position to switch, because their landlord won't allow it, or they have complex meters, or they don't understand the system, due to being elderly, or of low intelligence etc.

Your landlord cannot prevent you switching supplier. It's the choice of the bill payer.

A landlord can (and some less decent ones do) make it extremely clear that they'd prefer that a tenant doesn't though. 

how would the landlord even know? i cant remember the last time we had a bill delivered. 

michaels

jj_43 said:

michaels said:

The cap has helped make the UK energy market 'fairer', preventing those who are too lazy to shop around from being fleeced for their laziness.

However I think it may have added materially to the current crisis:

1) Supplier Hedging
Suppliers can not buy ahead a whole winter or longer when prices are relatively cheap as that puts them at risk that wholesale prices fall after they hedge and the cap comes in cheaper than they have bought at.  This means they pretty much need to hedge in exactly the same way the cap is set, each day they need to buy the amount of energy they will need to supply in 3/6 months times at the 3/6 month forward price.  For example we have recently seen a big run up in prices, had companies hedged the whole winter 2 months ago then it would have locked in about half the cost, yes it would have been costly had prices fallen instead of risen, but it would have given us certainty

2) Consumer Behaviour
The cap means consumer prices have lagged the increase in wholesale prices.  This has resulted in fixes always being priced higher than the current SVR which not surprisingly has resulted in most people deciding to risk it on future cap rather than fixing now and paying more for several months in the hope of then paying less.  Again, same effect, rather than people being on long fixes that would have protected them from the spike (with suppliers buying forward to hedge the risks) instead most are going to have to suffer the consequences.

So the cap succeeded in its stated aims but has completely screwed the UK energy market by making it impossible/unattractive to lock in the lower prices seen earlier this summer and thus cost us hundreds of billions.

related to 1) suppliers can still hedge for any period they choose and offer the hedge as a fixed price product. 2 months ago a supplier could offer a fixed price at the lower price than now, but it would have been higher than SVT.

Yes given the SVT and for risk management they will hedge in the same way as the cap is set. They could have a cheaper SVT if they are more cost effective.

You could view the SVT as a six monthly or now 3 monthly fix tracker product.

related to 2) suppliers to hedge in advanced, thats why SVT is so much cheaper than todays fixes, and is the product that allow us to lock in the lower prices seen earlier this year and last.

Now SVT is catching up to todays prices.

So the cap has basically resulted in the whole market being hedged 3-6 months ahead only.  Sensible risk management for consumers would probably have been to hedge the next 12 months, yes that gives a downside risk of ending up paying more if prices later fell but it is not a symmetrical problem, losing out on 1k in savings from a fall in prices would have hurt but facing an extra 1k bill because of price increases is catastrophic.

It is the cap that has resulted in this 'short term-ism' and put us at risk if there were a winter price spike which unfortunately has materialised.

ariarnia

ChaunceyGardiner said:

 Plus, people worry about long delays in receiving credit balances when they switch supplier or if their supplier goes bust. Unlike the other goods and services you mention, gas and electricity are fungible. Does it really make sense to have different prices for an identical product with no substitute?

there is a difference. the customer service and tools offered by the supplier to understand your bill. the amount of energy that comes from sustainable sources. etc. only small changes but might as well say does it really make sense to have different prices for (mostly) identical tins of beans because of the different brands and packaging?

michaels

michaels said:

The cap has helped make the UK energy market 'fairer', preventing those who are too lazy to shop around from being fleeced for their laziness.

However I think it may have added materially to the current crisis:

1) Supplier Hedging
Suppliers can not buy ahead a whole winter or longer when prices are relatively cheap as that puts them at risk that wholesale prices fall after they hedge and the cap comes in cheaper than they have bought at.  This means they pretty much need to hedge in exactly the same way the cap is set, each day they need to buy the amount of energy they will need to supply in 3/6 months times at the 3/6 month forward price.  For example we have recently seen a big run up in prices, had companies hedged the whole winter 2 months ago then it would have locked in about half the cost, yes it would have been costly had prices fallen instead of risen, but it would have given us certainty

Looks like OVO agree with me re the cap forcing 3 month hedging and thus exposure to volatility and high prices

OVO Energy

In the long-term:

8) Ensure the Future System Operator has a mandate for securing long term energy demand

Energy retailers like OVO buy energy in advance to hedge their customers’ consumption. The mechanics of the price cap mean we are now buying just three months in advance, exposing UK consumers and the economy to extreme price volatility. This is not good for anyone. Bills would be lower and more stable if our future energy needs were hedged further in advance. Over the past 10 years, the free market approach has worked to deliver affordable energy for the UK but we should accept that the next ten years are going to look very different. We are entering into an era of global competition to secure energy supplies and we need to think strategically, long term and at a national level. The remit of the publicly owned Future System Operator already includes short term balancing of the gas and electricity market. It should be expanded to allow for the long term procurement of the nation’s primary energy needs guaranteeing physical supply and providing price stability.