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Ofgem outlines plans to reform UK energy market

by SuperiorInvest

Britain’s energy regulator Ofgem has put forward proposals to reform the energy market, including changing how much suppliers can earn under a price cap and increasing capital requirements to reduce the risk of supplier defaults.

Ofgem he also said he would “carefully” monitor suppliers’ use of customer credit balances, but stopped short of suggesting they should be protected – a measure that companies such as Centrica have pushed for, accusing rivals of using customer balances “like interest-free credit cards”.

Vendor adjustment plan profit margins although it still allows them to use customer funds, it could be questionable at a time when households are struggling with cost of living crisis.

Chris O’Shea, chief executive of Centrica, the owner of British Gas, accused the regulator of “disclaiming responsibility” for failing to pay customer deposits.

“[Customers] they would be horrified to learn that their money was being used to fund day-to-day business activities, but that is exactly what is happening in some companies,” he said.

Ofgem said it would take further action if it emerged that the use of customers’ balances was “reckless”. Consumers typically overpay for the energy they use in the summer months, building up large reserves with suppliers that are then used up over the winter.

Under a price cap scheme introduced in 2019, the regulator limits how much energy companies can charge for a unit of energy, setting the allowed margin at a nominal rate of 1.9 percent of profit before interest and tax.

As sales rose due to the increase in the cap – which will jump from £3,549 this quarter to £4,279 for typical use from January – the amount energy suppliers can make has risen. According to Citizens Advice, retailers can currently make around £63 per customer, up from £24 in October 2021, when the price cap was £1,277.

The government’s decision this winter to subsidize customers with the so-called energy price guarantee has capped the amount households have to pay by capping the unit cost of energy, which equates to an annual bill of £2,500 in typical use. The government said it would reduce this subsidy from April, meaning the average bill would rise to £3,000.

Any move to more variable profit margins would likely initially be aimed at reducing the amount suppliers make during the energy crisis, but could allow energy retailers to make higher margins when the price cap is reduced as Ofgem seeks to build more resilience in the industry.

This could limit the amount by which household bills are reduced when wholesale prices eventually fall.

Jonathan Brearley, chief executive of Ofgem, said it was a “delicate balance” for the regulator and said plans for businesses to hold more capital would boost the sector.

“Ofgem wants well-capitalised businesses that can weather price fluctuations,” added Brearley. “[But] we also don’t want to block the market for new suppliers or force suppliers to sit on a lot of capital that could be invested in innovative ideas.”

The proposals come amid heavy criticism from the regulator after 30 energy supply companies failed in the past 18 months due to insufficient capitalization amid rising wholesale gas prices.

A National Audit Office report earlier this year said households are paying the price Ofgem’s easy access to monitoring.

Ofgem is also proposing a potential extension of the market stabilization charge – which compensates companies at the consumer’s expense if customers switch suppliers before using energy bought for them at high wholesale prices.

Suppliers must also remit cash collected from customers to pay into green energy programs.

Consumer lobby Citizens Advice has warned that energy suppliers are making higher profits as the industry’s regulator has shifted some of the risks and costs of running their businesses onto household bills.

The £2.7bn cost of transferring customers from failed suppliers has already added £94 to every household’s bill. That amount is expected to rise next year as Bulb, by far the biggest failure, moves out of effective nationalisation.

Ofgem will consult on the proposals with a view to bringing them into force in spring 2023.

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