Ofgem has altered the parameters for its market stabilisation charge (MSC) – a temporary measure introduced in April to limit suppliers’ hedging losses if wholesale prices fall substantially – to make it stronger and more easily triggered.
The regulator said the adjustments will make the charge “more robust” in the face of increased hedging risks following Russia’s invasion of Ukraine.
The MSC was one of two measures given the go-ahead by Ofgem in February to stabilise the energy market – the other being a requirement on suppliers to offer existing customers the same deals that are available to new ones. Suppliers are required to pay the charge to the losing company when they acquire a new customer but only if wholesale prices fall significantly below the level assumed in the price cap.
At the time, Ofgem said the charge would “make sure that energy companies do not take disproportionate financial risks and suppliers who have done the right thing by purchasing energy in advance for their customers aren’t penalised”.
“These two measures recognise that the price cap effectively rules out some options suppliers might otherwise use to manage wholesale volatility, and they are necessary to mitigate the risks to suppliers if wholesale energy prices fall back towards historic levels,” the regulator added in a decision document released on Monday (16 May).
Ofgem explained that the impact of the MSC is governed by two main parameters – the amount by which wholesale electricity or gas prices must fall below the levels assumed in the price cap to trigger the charge (the threshold), and the percentage of the incremental hedging losses incurred by a notional supplier, beyond the threshold, that is covered by the charge (the de-rating factor). These parameters were initially set at 30% and 75% respectively.
The regulator has now decided to lower the threshold to just to 10%, whilst raising the de-rating factor to 85%, meaning the charge would be more easily triggered and worth more if it is.
Ofgem said its modelling indicates that its notional supplier – 5 million customers and 100% hedged – would remain financeable at these rates, with “low but positive” earnings before interest and tax.
“In this context, it should be noted that, given the current very high level of prices, a threshold of 10% would still enable active customers to access significant gains based on falls in the wholesale market, even with a de-rating factor of 85%,” it added.
“For example, if the price cap cost is assessed at £2,000, a 10% threshold would allow consumers to access the first £200 of savings if wholesale prices fall, before the MSC has any impact.
“In addition, consumers who switch will also be able to make gains from the normal competitive opportunities – for example from better systems and lower cost bases, regardless of the MSC.”
Ofgem has also decided to adjust the MSC calculation to take account of electricity losses and unidentified gas. The new parameters will come into effect on 25 May.