Households risk missing out on cheaper energy deals after the watchdog’s decision to keep supplier compensation arrangements in place beyond March, despite falling wholesale gas prices.
The ‘market stabilisation charge’ (MSC) – which sees energy suppliers compensate rivals if customers switch before using the energy the company had bought for them at high wholesale prices – will be extended indefinitely, Ofgem said today.
The regulator added that, although wholesale energy prices have fallen significantly since last summer, volatility remains high and this temporary policy is still needed to protect customers and suppliers alike until the market stabilises.
Energy suppliers need to compensate rivals if customers switch before using the energy the company had bought for them at high wholesale prices
However, Ofgem said all consumer groups that took part in its consultation were critical of the market stabilisation mechanism, arguing it would dampen competition.
Critics have also previously pointed out that it would prevent firms from lowering bills for customers when wholesale prices fall.
Since April last year, energy suppliers that poach customers from another firm have had to compensate the supplier losing customers.
MSCs are meant to protect suppliers who would otherwise incur losses on energy bought at higher prices for their consumers in the event they switch away in large numbers when wholesale prices fall.
Ofgem argues the policy helps stabilise the market at a time when firms have to hedge their energy needs in line with the energy price cap, which limits how much a typical household will pay a year for energy.
It says that these charges provide ‘an element of protection against the downside risk, so assisting suppliers in being able to continue hedging for consumers in accordance with the price cap’.
‘Without the MSC, suppliers would be likely to hedge insufficiently in accordance with the price cap methodology (so as to try to mitigate the risk in a falling market) but could then experience severe difficulties or fail if wholesale prices rose instead, leading to higher costs for consumers,’ Ofgem said.
The watchdog estimates that consumers would be more than £1billion better off thanks to the policy ‘by avoiding incentives for companies to under-hedge’.
However, critics and consumer groups have previously pointed out that suppliers won’t be able to pass on the full savings to the customers when prices begin to drop.
Ofgem conceded that the significant fall in wholesale energy prices from their peak led to some forward energy prices falling below the price cap, resulting in a ‘relatively small amount of MSC payments’.
Until the end of next month, the typical UK household energy bill will be capped at £2,500 a year, rising to £3,000 from April.
However, wholesale prices have been falling recently, with analysts predicting they could be falling faster than expected this year.
The watchdog today also announced it was extending the temporary ban on acquisition-only tariffs, which prevents suppliers offering a deal to a new customer without also offering it to its existing customers.
Consumer groups have welcomed the decision, with some suggesting this becomes a permanent feature as it would help promote fairness in the market.
