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Helm: Long-term price cap would bring market stability

A longer-term price cap will mean suppliers will “have to get serious” about covering their positions within the energy market, a leading academic has suggested.

Ofgem has been considering switching to a quarterly price cap to reduce the time lag between market prices and their reflection in the cap.

However, speaking at Utility Week’s Customer Summit last week, Dieter Helm, professor of economic policy at the University of Oxford, said he believed a longer-term cap was a more preferable solution.

He said: “We ought to move not from six months to three months but to one year price caps. This would force the energy suppliers to contract long, and that’s one of the reasons why our markets are so unstable; that policy people convince themselves that the answer to the future was to have ever more spot market trading and move away from any long-term contractual framework.”

Following the speech, Helm was asked about whether large energy retailer Bulb becoming the first supplier to be placed in the Special Administration Regime (SAR) was an opportunity for the government to do something different; whether the situation would allow ministers to propel wider changes to the market.

In response, Helm said there was “of course” an opportunity but the chances of the government taking it are “pretty close to zero”.

He continued: “There are those people who think if you just put some prudential regulation in place then it will be fine. But actually what I suggested was you put in place a longer term price cap, and then of course all the suppliers will have to get serious about covering their position not just for a few weeks but for a year ahead.

“That then changes the nature of this market because it puts a floor underneath it of serious longer-term contracts. That’s what privatisation missed. There’s nothing special in competitive terms about everything being on spot. You need spot markets to clear things but what we really need is a stable underlying framework to meet the stability requirements of customers.

“Markets are there to serve customers, not to serve people who want to make money out of customers. They should make money by delivering what you and I want, not what they would like us to have.”

In an earlier sessions, Ofgem’s director of retail Neil Lawrence said the regulator is facing a “Hobson’s choice” when it comes to deciding how to adapt the price cap in light of the energy crisis.

He said: “I think what we need to be aware of as an industry now is we don’t want to do anything that’s going to make the situation worse. So we need some optionality on the steps that we take and we need to make sure that in those decisions we take that the risks are understood.

“That’s why we are working very, very closely with suppliers around that discussion and it’s not being done in a darkened room because for everything we do it appears that we are taking Hobson’s choice – taking a decision that appears to actually have negative consequences either way so we need to really wake up to that.”x