A one-off adjustment to the price cap or even quarterly caps should be considered by Ofgem and the government, an ex-big six chief has suggested.
Former Npower boss Paul Massara was talking about options he believes the Department for Business, Energy and Industrial Strategy (BEIS) and the energy regulator will be considering as part of the industry’s response to the influx of supplier failures following a spike in wholesale costs.
Yesterday (22 September) the market saw its biggest ever failure with the demise of Avro Energy.
The disruptor brand had 580,000 customers, while its Newcastle-based rival Green also exited leaving 255,000 more for the supplier of last resort (SoLR).
Speaking to Utility Week this morning, Massara said: “I wonder whether they need to be thinking about maybe a one-off adjustment or maybe adjusting the price cap every quarter rather than every six months.”
He added: “I think it’s a possibility because then at least it makes that price adjustment more reflective of the underlying market. That would have some merit.
“Obviously it adds some volatility to customers, but I think on balance that’s probably a fair thing to do. Otherwise at the moment large companies could be taking on these customers now on a price cap that’s coming in October that was set two or three months ago.”
Also speaking to Utility Week was Adam Bell, head of policy at management consultancy Stonehaven, who said he expected the government to think about more longer-term reforms to the price cap regime.
The former head of energy strategy at BEIS said he thought it would be “politically challenging” to introduce short-term adjustments to the price cap to cope with the current market situation.
He said: “There is a massive spike in wholesale energy prices right now and in the absence of revenue from government credit, if you relax the price cap suppliers will respond by trying to recover as much of those costs as possible in the short run because they won’t have the cash flow to do otherwise.
“If you were to retain the cap and extend the line of credit then those costs can be spread out over a longer period and you don’t have the very real risk of a lot of costs being applied to consumers over the winter which would obviously be extremely politically challenging.
“My assumption is that the government will not look to relax the price cap until possibly in the first few months of next year at which point we would be coming up to the next review point anyway. What I do expect though is for the government to consider reforms to the price cap regime in the longer term and think about more review points, greater flexibility and greater scope for intervention.”
Additionally Bell said he believed, to a degree, that simply thinking about the future of the price cap “does somewhat miss the picture”.
“The reason we are losing so many companies is because margins in supply are very thin. It’s genuinely time for government to think about what role suppliers have in the system, and whether they are appropriately structured for what is quite frankly going to be continued volatility across all energy markets over the next 30 years,” he added.
So far this year a total of nine suppliers have exited the market, equalling the previous record which was set in 2019. Industry experts believe several more suppliers could fail before the situation eases.