Ofgem has been heavily criticised for a historically relaxed approach to regulation in which it allowed dozens of inexperienced, underfunded suppliers rush into the market in recent years under efforts to encourage competition, only to collapse when gas prices started surging last August.
It is trying to avoid a repeat of those collapses with the changes to the way the price cap on energy bills is calculated, which include allowing suppliers to recoup costs sooner for buying energy in advance.
On Wednesday night, a spokesman thanked Ms Farnish for her service, adding: “The rest of the board decided a shorter recovery period for energy costs was in the best interest of consumers in the long term by reducing the very real risk of suppliers going bust, which would heap yet more costs onto bills and add unnecessary worry and concern at an already very difficult time.”
So Ofgem has decided to allow the energy companies to charge consumers for the costs of hedging. That’s what’s buried in there. Which seems a most odd decision. Hedging reduces risk – if done right of course. So that’s something that capital should be paying for. But then regulators always do get into such messes when they try to decide prices, don’t they?
Lol. They want competition and to avoid any firms going under. Nutters.
This would all be moot if Theresa May hadn’t introduced the energy price cap.
Also, doesn’t the tax regime change if a company has more than x00,000 customers ? It makes them less competitive, because they are now in the Big League and don’t have the bottom to withstand price shocks.
Ofgem isn’t the Ministry of Gems?
I loathe the Newspeak renaming government agencies in a bid to opacify what they do.
Actually, Tim, what Ofgem has decided to do is to reduce the capital required to fund the cost of hedging by speeding up the recoupment of the cost from consumers. Thereby it is reducing the risk of more insolvencies among under-capitalised energy distributors (British Gas, EDF, e.on aren’t at risk). The bad news is that it will add to consumer bills at the worst time, next winter, and reduce them when it matters less, the following summer.
The cost of hedging should be included in the capital required when drawing up a business plan but any pre-invasion estimates of the cost would have been a fraction of the current actual cost, so most new entrants don’t have enough capital for their needs.
“allowing suppliers to recoup costs sooner for buying energy in advance.” plus “shorter recovery period for energy costs was in the best interest of consumers.”
Seems to imply more volatile consumer bills, and that the apparent price per unit de-couples from actual usage. The prediction game shifts further forward in time – what instruments are available? How would this affect generators?
Something screwy – would retail suppliers end up looking like endowment funds?
Hedging reduces risk – if done right of course. So that’s something that capital should be paying for.
If tax incidence is a thing then so is cost incidence. The customers will be paying for it one way or another.
Hedging costs money, so with a competitive market where some companies hedge and others don’t, the ones which don’t will edge ahead in lowering prices to attract customers as long as the price is stable. Then when the price must go up, in a free market those companies must increase their prices faster than those who hedged, this losing customers. However, with a price cap, they instead go bust. A free market would let customers choose their level of risk (possibly by choosing longer term fixed price contracts directly): an artificially limited market makes things go spectacularly wrong.
And I expect that the people complaining about companies not hedging are the same people who would complain about companies not immediately passing on price reductions – you can’t have it both ways.
@Ottokring
iirc you’re correct, “Green Levy” aka Tax doesn’t apply to ‘small’ suppliers
Doesn’t it depend on other details of how the cap is set?
As I understand it (I’ve struggled to find much clarity online, tbh), it’s set by preference to prevailing energy costs, (or is it an estimate of upcoming energy costs) with the intention that SVRs aren’t set at excessive levels that are considered to profiteer from people who don’t switch?
Question is, which measure of energy costs is it based on? Is it objective wholesale market data (spot rates, futures markets) or is it by reference to the expected costs of the suppliers themselves (either collectively or individually), taking into account their hedging strategies? (Could they do some sums around the extent to which the market is hedged?)
If it’s the former, I’d probably tend to agree with Tim. If it’s the latter, it seems reasonable for the cost of the hedging to be factored in.
@Bloke on A720
Price cap:
– live in a leaky hovel, max bill £3,500
– live in a Prince Harry of Green Woke mansion, max bill £3,500
Poor suffer, rich use more energy : more demand, price increases, not that msm mention this
Socialist May adopting socialist Milliband policy and weak blu-lab continue it
Headlines now coming back to bite them
@pcar
Nope. Not how it works.
The cap restricts the rate per unit, (and probably also standing charge rates) not the overall bills. Harry will therefore still pay proportionately more.
The media just choose to report on what the cap equates to for the average household’s annual bill for simplicity. (Which is probably fair enough; the price per unit is actually a bit complicated, e.g. varies by region, and people are thick.)