Ofgem has confirmed that its Market Stabilisation Charge (MSC), which has been extended several times in the past, will finally come to an end in March next year.
As wholesale energy prices began to soar in 2022, the MSC was introduced as a temporary measure to ensure fair competition, along with the ban on acquisition only tariffs.
Suppliers are required to pay the MSC 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.
Both the MSC and ban on acquisition tariffs have been extended twice previously, with the latest extension lasting until March 2024.
In an open letter to the sector, the regulator’s deputy director of price protection Dan Norton confirmed the MSC will expire at the end of its latest extension.
Explaining Ofgem’s position, Norton said: “Our view is that market risks that the MSC is designed to mitigate, around instability and volatility, are now markedly less. As a result, the likelihood of supplier failure as a whole, and estimated costs to the rest of the market and consumers as a result of any failure, are also significantly lower, relative to that at the time of our February decision.
“The MSC’s negative impact on competition is also greater than at the height of the crisis in 2022, when suppliers were focused more on stability and survival than on competing against each other.
“As we are slowly seeing competition re-emerge in the markets, the MSC is reducing incentives for existing suppliers to compete and potentially acting as a deterrent for new suppliers to enter the market, both of which have negative repercussions on the ability of consumers to benefit from switching.”
Norton further explained that Ofgem considers the market’s remaining suppliers to be more financially resilient and better capitalised than many of the retailers which exited the market recently.
He added: “We also expect to see suppliers increasing their capital positions in 2024 in line with the minimum capital requirement, effective from 31 March 2025, introduced to, amongst other things, strengthen supplier resilience such that they can better absorb losses in light of severe but plausible financial shocks and thereby minimising the risk of future supplier failures.
“Revised EBIT allowances, in place since 1 October, should also bolster suppliers’ future ability to absorb future price shocks. Alongside the enhanced Financial Responsibility Principle which came into effect on 31 May 2023, we consider that these measures should make suppliers more resilient to market instability, enabling them to tolerate higher VaR (Value-at-Risk) levels and further reducing the need for the MSC.”
On competition, Norton warned that the MSC is having “a significant dampening effect” by reducing incentives for established retailers to compete.
While the regulator is seeing new suppliers looking to enter the market, the MSC is “likely to be acting as a deterrent to entry as a result of high costs whenever new suppliers acquire customers”.
“In addition, now that prices are less volatile there are some circumstances where the MSC may effectively penalise suppliers who are hedging efficiently, compared against suppliers who have under-hedged,” he added.
Norton’s letter also updated the industry on the future of the ban on acquisition only tariffs, which was also due to expire next March.
He said that Ofgem believes the ban may have also played a role in dampening competition by reducing switching for existing and new customers.
“On the other hand, BAT may incentivise new market entrants, on the basis that existing suppliers are unable to offer aggressive, loss-leading deals to dissuade customers from joining new competitors,” he added.
The regulator will undertake further analysis of the ban’s impact on the market, to assess the consumer benefit of retaining it beyond its scheduled end date.
Elsewhere Ofgem has published a call for input in which it is seeking views from the sector on its ideas about approaches to benchmarking energy suppliers’ operating costs.
The price cap includes several allowances for domestic supplier operating costs.
These are:
- Core operating costs allowance – a supplier’s own costs of retailing energy;
- Smart Metering Net Cost Change (SMNCC) allowance – the net cost of installing and operating smart meters as part of the transition for the smart meter rollout; and
- Payment Method Uplift (PMU) – allowances for the additional costs of serving customers who pay by different payment methods
As part of its operating costs review, Ofgem is considering how to set a single allowance in the price cap using data from different suppliers.
Ofgem has also published proposals to introduce a temporary increase to the price cap over fears bad debt could force more energy retailers to go bust. You can read Utility Week’s article on this here.