Written evidence submitted by uSwitch (WIN0037)

 

Executive Summary

 

        The Energy Price Guarantee (EPG) was a welcome and necessary step to prevent sharp rises in wholesale costs being passed on to consumers. There is a strong argument for retaining the EPG as a circuit breaker during a period of sustained higher costs, to give households the confidence they would be protected were there to be a further significant spike in wholesale prices. The current system of price control leaves households exposed to price shocks, notably including the default tariff cap. This should be addressed by replacing the price cap with a new Energy Fairness Charter, putting strict requirements on suppliers to provide fair standard tariffs, alongside targeted support for the most vulnerable households, and the EPG remaining in place as a short-term circuit breaker to protect against price spikes.

        To adequately protect consumers, policymakers need to achieve a number of goals: supporting the most vulnerable; driving down prices for most households; protecting households from spikes in energy costs; and supporting the transition to net zero. However, the existing price cap and lack of targeted protection for the most vulnerable means the Government and Ofgem are failing to achieve these goals. The price cap should be replaced with an Energy Fairness Charter, alongside an Energy Credit for those on low incomes, whilst the Government should also implement regulatory reform to drive down prices by committing to ending the Market Stabilisation Charge (MSC) and the Ban On Acquisition-only Tariffs (BAT) as soon as possible.

        Current pricing and regulatory controls are failing to deliver a functioning energy market. The existing price cap is not achieving the goals for any effective system of consumer protection and is disincentivising investment in the transition to net zero. There is a clear opportunity to develop a new approach for price protection by moving beyond the default tariff cap, allowing the Government and Ofgem to control the price consumers pay for energy without directly setting the price.

 

Response to specific consultation questions

 

What more could have been done to prevent price shocks being passed to consumer bills? How should energy companies respond if customers cannot pay their bills and what actions should they not have recourse to?

 

The Government took welcome and necessary action to prevent sharp rises in wholesale costs being passed on to consumers through the Energy Price Guarantee (EPG). The spike in wholesale energy prices caused by Russia’s invasion of Ukraine would have seen Ofgem’s price cap increase to £3,549 in October 2022, an increase from £1,277 the previous year. The EPG, introduced in October 2022, limited the cost of each unit of energy, meaning the average household paid no more than £2,500 for their energy bills, acting successfully as a circuit breaker in the face of a spike in wholesale prices.

However, while wholesale energy prices are falling significantly (weekly forward contracts are now being priced at under £125 MWh at the end of June) this is still not being passed on to households in the form of lower bills. More broadly, prices are set to remain high, and significantly above their pre-invasion levels, for over a decade.[1] This means that being prepared for further spikes in prices is more important than ever. However, alongside the end of the EPG in March 2024, the Government and Ofgem have taken a number of policy decisions that will leave households exposed to sharp rises in wholesale price rises.

First, the price cap is now updated on a quarterly basis, meaning that any future spike in wholesale prices will be more quickly passed on to households. In addition, the price cap itself does not protect households from wholesale costs, as it only sets the amount that energy suppliers can charge at a given wholesale cost, rather than mitigating the impact of wholesale prices on households. This means that, in the absence of other protection for households, the price cap will simply pass on wholesale energy costs, leaving households exposed in the event of a further spike.

Second, the price cap provides no targeted protection for low income households, but instead acts as a blunt instrument that leaves vulnerable households exposed to higher wholesale costs. This is already a major issue as, over the past two years, the number of households in fuel poverty has risen from 3.26m (13.4%) in 2021 to 3.53m (14.4%) in 2023 — an increase of over 250,000 households.[2] Energy prices are unlikely to fall to pre-crisis level for well over a decade, so the Government must address this lack of targeted support. To achieve this, we propose an Energy Credit for low income households. The Government should target this at those in receipt of Universal Credit, directly discounting bills before they are paid through the same mechanism as the existing Warm Homes Discount. This would ensure a consistent level of protection against spikes in wholesale prices for those households who are most exposed to an increase in costs.

Third, the Government should keep the existing EPG in the short term to give consumers confidence in the event of a significant spike. The EPG should be retained at the existing £3,000 level, meaning that it is extremely unlikely that it should be needed but that a circuit breaker will be in place if needed. This extension to the EPG can be funded by an automatic windfall tax on energy generators when wholesale prices reach a threshold set by the Government, meaning that there is no additional cost to the Treasury. In the longer-term, the Review of Electricity Markets Arrangements (REMA) should reduce the exposure of households to changes in wholesale prices, but the retention of the EPG will offer valuable short-term protection.

Finally, the Government should look to replace the price cap — which passes on wholesale prices to households rather than providing protection from a spike in costs — with a new system that does more to drive down costs for households. We go into this in more detail below.

Has Ofgem got its priorities right in addressing customer protection?

 

To adequately protect consumers, the Government and energy regulator must achieve a number of goals. These are: protecting the most vulnerable; driving down prices for households; protecting households from a spike in energy prices; and supporting the transition to net zero.

While well intentioned, the existing price cap fails to protect the most vulnerable and leaves households to pay for sharp rises in wholesale prices. The current level of the price cap, £1,923, is 14% of the median disposable income of the poorest 20% of households and 8.8% of the next 20%.[3] The high cost of energy to those with low incomes and rising fuel poverty both demonstrate that the default tariff cap is failing to protect the most vulnerable.

Instead of blanket approaches across the entire market, like the default tariff cap, the focus needs to be on protecting vulnerable consumers and encouraging competition to drive down prices more broadly. The sheer number of households on the default tariff — 27 million including those on prepayment meters — demonstrates the lack of competitive alternative options on the market. Before the introduction of the cap, responsible suppliers would hedge (buy energy in advance to match the demands of customers) a significant proportion of energy needs up to two years in advance, allowing them to offer more competitive deals, with less regular price changes for customers. According to Cornwall Insight, the cap forces all suppliers to hedge in the same way and on much shorter timescales, driving prices up for consumers.[4] Ofgem itself has recognised that it is not a long-term solution and it needs an option that ‘better meet[s] customer needs in a world where prices may continue to be highly volatile’.[5] The price cap removes many of the tools available for suppliers to protect customers from the volatility of the market. Therefore, the current approach to consumer protection is increasingly unfit for purpose, particularly when energy prices are both high and prone to fluctuation. There are a number of changes that Ofgem should make to ensure that it takes a genuinely effective approach to consumer protection. 

First, the Government should move beyond the default tariff price cap to protect the most vulnerable and drive down energy prices for households. The price cap should be replaced with an Energy Fairness Charter, enabling Ofgem to effectively protect consumers with a series of new requirements on suppliers. This will afford a base-layer of future-proofed price projection as an evolution from the price cap. These should include: the requirement for suppliers to offer a default tariff; the default tariff price must be fair and reasonable, based on the supplier’s costs; and suppliers must hedge appropriately and in a prudent way. This will ensure fair treatment for all customers and lower prices through increased competition. The Government can introduce these changes by amending the Domestic Gas and Electricity (Tariff Cap) Act 2018.

Second, the Government should complement this broader support with a targeted Energy Credit, supporting those in receipt of Universal Credit, that would directly discount bills before they are paid through the same mechanism as the existing Warm Homes Discount. This targeted support, currently not included in Ofgem’s approach to consumer protection, would stop energy bills becoming unaffordable for households with lower incomes.

Third, Ofgem should use regulatory reform to drive down prices, by committing to ending the Market Stabilisation Charge (MSC) and the Ban On Acquisition-only Tariffs (BAT) as soon as possible, and no later than March 2024. While these were both measures designed to make the retail energy market more financially secure, the reality is that they are increasingly raising energy prices for households. The costs suppliers would face as a result of the MSC are stopping them from offering more competitive deals as wholesale prices fall, and the fact that the BAT makes it harder for suppliers to attract new customers with more competitive deals and through lower threat of losing customers to a competing suppliers, significantly dull the incentive to offer better prices to existing customers. Ending these would create the competition needed to lower prices and give households the opportunity to access cheaper, fixed-price deals now, and cut their energy costs and improve their financial security ahead of winter.

How effective is the Government's approach towards supporting the sector and delivering a functioning energy market? Is the legislative framework on pricing controls suitable for protecting consumers?

 

The energy market has been in crisis, and the Government now has the opportunity now to rebuild an effectively functioning market. In particular, the current pricing and regulatory controls effectively block increased competition and innovation, leaving customers to pay higher bills for a lower quality service. For example, Government figures show that flexible energy use could reduce bills by £10bn per year by 2050, around a 5% reduction in the average household’s bill.[6] Instead, the market is frozen by the current regulatory environment as suppliers are not incentivised to continuously improve their offering, leaving households to foot the bill.

Ofgem is failing to adequately regulate the market, with the default tariff cap partly functioning as a form of state price control. There is a need for efficient, open markets composed of diverse businesses competing to ensure that customers benefit from improving services and falling prices. While the current issues in the energy market are in part a result of the existing legislative framework, they are also driven by the regulator focusing too much on preventing supplier failure, rather than ensuring the energy market is healthy and works for consumers.

While well-intentioned, the existing price cap is not achieving the goals for any effective system of consumer protection, as it does not protect the most vulnerable, drive down prices, shield households from rising wholesale costs, or support the transition to net zero. As the price cap is the main legislative framework for price controls, the existing framework clearly is not adequate for protecting consumers.

As we have outlined in this response, the price cap is too blunt an instrument, and more targeted support is needed to protect the most vulnerable from higher prices. Moreover, the price cap stifles competition, with suppliers not incentivised to reduce prices below the level of the cap. Further, wholesale prices quickly impact households’ bills, as the price cap is now being adjusted every three months rather than six.

On top of this, the price cap is slowing the transition to net zero by deterring the investment needed to drive innovation in the market. This includes slowing down the full implementation of the Market-wide Half Hourly Settlement (MHHS), one of the key drivers towards net zero in the retail energy market and, more broadly, creating a market in which there is no meaningful competition between suppliers on the quality of their products. The cap removes incentives for consumers to reduce their usage, or use energy at a time when there is less pressure on the National Grid, which would otherwise reduce bills and make it easier for energy needs to be met from renewable sources, which can still be prone to some fluctuation.

Therefore, there is a clear opportunity to develop a new approach for price protection by moving beyond the default tariff cap, allowing the Government and Ofgem to control the price consumers pay for energy without directly setting the price. As we have set out previously in this response, the new approach should include an Energy Fairness Charter, creation of an Energy Credit scheme, and keeping the EPG as a backstop circuit breaker.

This should include placing statutory duties on Ofgem to encourage competition and innovation through amending the Energy Bill. Too often the regulator’s behaviour is not encouraging suppliers to genuinely lower prices, instead leaving all households on the default tariff cap, with a lack of competition meaning that household prices do not fall, even as wholesale costs do.

Lastly, suppliers should be encouraged to offer more good fixed-term deals as part of wider efforts to improve consumer protection. Ofgem should build on what is already happening within the market of fixed-term deals and strongly encourage suppliers to offer more fixed-term deals, while more broadly ensuring that they are not excessively profiting while wholesale prices fall, and protecting households against potential price shocks in the winter. This should be accompanied by the regulator’s wider work on consumer protection, including the future of the price cap.

About Uswitch

 

Uswitch is one of the UK’s top comparison websites for home services switching, including broadband, mobiles, SIM Only and insurance. We’ve saved consumers over £2.5 billion off their bills since we launched in September 2000.

 

In 2022, Uswitch launched its free mobile app, Utrack, to help consumers manage their home energy costs. By connecting to their smart meter, users can track their energy usage hourly, get dynamic insights and calculate potential savings with handy tips.

 

Uswitch is part of RVU, a global group of online brands with a mission to empower consumers to make more confident home services, insurance and financial decisions.

 

August 2023

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[1] Ofgem, Wholesale market indicators, August 2023 (link)

[2] Department for Energy Security and Net Zero, Annual Fuel Poverty Statistics in England, 2023, 28 February 2023 (link)

[3] ONS, Average household income, UK: Financial year ending 2022, 25 January 2023 (link)

[4] Financial Times, Has Britain’s energy price cap run its course?, 22 August 2022 (link)

[5] Jonathan Brearley, Speech at the Institute for Government, 24 January 2023 (link)

[6] Department for Business, Energy and Industrial Strategy and Ofgem,Transitioning to a net zero energy system: smart systems and flexibility plan 2021, 20 July 2023 (link)