Energy sector facing more dramatic changes in 2019

The energy sector is never far from the news, but last year saw it make unprecedented headlines as eight suppliers ceased trading. One of the major causes given for this was the domestic price cap on gas and electricity bills, which came into effect at the beginning of 2019.

From 1st January, suppliers’ default tariffs are capped so that for the average customer on direct debit, their dual fuel bills will not exceed £1,137 in a year. Ofgem has identified savings of £1 billion to customers through this measure, with greater savings possible if customers decide to shop around for an even cheaper deal – an activity Ofgem has historically struggled to get the majority of energy customers to engage with.

Many suppliers argued that the price cap, with steeply rising industry costs last year, was set too low. Ofgem stood by the price cap, going so far as to defend it at a judicial review launched by Centrica last year. However, it announced late last week that a review of the cap due in February could result in a “significant” increase as early as April, due to those same rising industry costs.

Before the price cap was announced last year, many suppliers found that rising wholesale prices were making the low fixed-cost energy tariffs they had sold unsustainable. With many of their market hedges out of the money, or without the cash reserves or credit to hold sufficient hedges in the first place, the prospect of losing their most profitable tariffs in the new year was, in some cases, more than they could sustain. A pattern of growing customer complaints followed by collapse into the statutory ‘safety net’ (the Supplier of Last Resort scheme) developed.

The loss of the suppliers last year was not without consequence to customers. The failures caused a loss of customer confidence in the industry as a whole and a great deal of uncertainty and inconvenience to the affected customers. In addition, the lost suppliers landed the industry with an £80 million bill under the Supplier of Last Resort scheme and missed payments into the green energy subsidy schemes. It is likely the industry will, in turn, pass these increased cost on to the customers.

Ofgem has reacted to the culling of smaller suppliers with proposals to toughen up the barriers to entry for new suppliers. In the past Ofgem has not considered the financial position of new suppliers but, with the number of new suppliers having increased dramatically over the past two years and with energy minister Claire Perry saying last week that she expected to see further failures in 2019, Ofgem appear to be in a hurry to put new measures in place, and are proposing a test to ensure that new suppliers have sufficient funds to trade for at least 12 months after market entry.

While this might go some way to reassuring customers, it will not affect the existing suppliers, who will be hoping for some market stability and an increased cap in the coming months.

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