The number announced on Friday, as predicted by many, is news that is disappointing at best and likely depressing for many households across the country. Because of the importance of this change and what it represents for the wider energy crisis in Europe, it is worth taking a look at this pricing mechanism, why it exists and what impact it has on both energy companies and households. Photo by iMattSmart
Boom or Bust
Before we dive into the current situation, it’s worth taking a look at the winter of 2021/22, when it seemed like a small energy supplier collapsed every week. The most notable of these collapses was Bulb, a company that supplied over 1.5 million customers with gas and electricity before ceasing to trade at the end of 2021 and entering special administration on 24 November that year. a state of uncertainty in which it remains to this day. A key reason behind the collapse of so many small energy companies was Ofgem’s price cap. The mechanism, introduced by Theresa May’s government in 2019, was intended to prevent consumers who stayed loyal to their energy providers from paying higher energy bills than those who frequently switched providers to secure more favorable deals. While this seems an undeniably admirable attempt to eliminate energy company profit at the expense of the average consumer, the unintended consequences of introducing a price cap are now reverberating through the market louder than ever. TTF natural gas prices from September 2021, including ChAI forecast to November 2023. The price gap changed the landscape of the UK energy market because it gave a significant advantage to those companies with deep enough pockets to hedge or buy future wholesale energy. Industry giants such as British Gas or Centrica-owned Eon therefore had a significant advantage over those smaller players who would buy their wholesale energy on short-term contracts. When natural gas prices began to rise and push the cost of wholesale energy above the price ceiling last winter, companies that were buying at those high prices were therefore unable to pass their costs on to their customers, resulting in the wave of suppliers to collapse in the last year. Meanwhile, many of these industry leaders who survived last winter are making record profits in 2022. British Gas has pledged to donate £12m, or 10% of its profits for the first half of 2022, to help most vulnerable households in the coming crisis, which seems a well-intentioned gesture. However, against the backdrop of parent company Centrica’s profits of £1.34bn since the first half of this year, it is likely that the offer from British Gas will be seen as subdued. The reality is, of course, more nuanced than that. The majority of Centrica’s profits came from the exploration of oil and gas and the subsequent sale of the two commodities during a period of record prices, rather than from tapping the bank accounts of ordinary households. But at a time of national crisis, it remains to be seen whether nuance will guide discussions about how to deal with the crisis. Photo by Anja van de Gronde
Time to review the cap?
Friday’s price cap announcement will spell ominous news for households and unfortunately it’s a situation that is likely to get worse. The new cap which will come into force on 1 October has only been set until the end of the year and another announcement will be made on 24 November regarding the cap for the period from 1 January to 31 March 2023. Predictions from analysis firm Cornwall Insights previously suggested that the new year could bring a further 31% increase, taking the annual total to around £4,500 a year for an average household. However, to coincide with the actual cap rise on the morning of Friday 26 August, Cornwall Insights has updated its forecast price cap for the first quarter of 2023 to an impressive £5,386 per annum. It is clear that whatever the reality of the increased bills that households will face for their natural gas and electricity, some kind of change is needed in the domestic energy market. Commenting on Friday’s rise, Cornwall Insights said the cap was “never intended to be a permanent solution” and called for a review of all “viable alternatives” that could be implemented in its place. Indeed, some energy companies, including Scottish Power, have similarly called for an overhaul of the cap. The company’s CEO, Keith Anderson, recently said in an article for the Financial Times that the cap should be replaced by a social tariff that would protect the most vulnerable households from significant bill increases, at least until the market stabilizes. While this could provide an imperfect solution, the idea of when the energy market will be “stable” is another problem. Ultimately, any proposals for long-term solutions to protect low-income households from crippling energy bills in an increasingly volatile world for oil and gas prices do not solve the immediate problem. The government’s response to the crisis has yet to materialize in any real form, and while that may change after the UK’s new prime minister is confirmed on September 5, many are understandably calling for a quicker response. Today’s announcement may indeed force more immediate action. Fuel poverty for millions of households across Britain is no longer a forecast, but an inevitable reality. By ChAI More top reads from Oilprice.com:
