Written Evidence: Business, Energy and Industrial Strategy Committee - Inquiry on Energy pricing and the future of the Energy Market

Research output: Book/ReportOther report

Abstract

•The 2018 Domestic Gas and Electricity (Tariff Cap) Act came into effect in January 2019. The cap limits the default tariff rates suppliers can charge for energy and gas, as well as standing charges. Since its introduction, the cap has provided a degree of price certainty to consumers.

• In response to rising wholesale gas prices, Ofgem increased the price cap in April and October 2021. The cap is expected to increase again in April 2022.

• Low and middle-income households in the UK are most vulnerable to the impact of rising energy prices. Rising energy prices, compounded with economic stress associated with the Covid-19 pandemic, inflation, and falling real wages, exacerbate inequalities between income groups.

• In 2021, a range of factors led to a sharp increase in wholesale gas prices. The spike in wholesale prices, combined with the energy price caps, forced many suppliers to set retail electricity prices below wholesale costs. Almost 30 energy suppliers in the UK ceased operations between 2021 and 2022.

• The wave of UK energy supplier bankruptcies indicates that many suppliers were not prepared for an acute short- to medium- term rise in wholesale UK energy prices.

• Evidence suggests that hedging strategies are currently underutilised in the UK. Retail energy market reforms aimed at bolstering financial and natural hedging practices among suppliers could curb the risk of such market failures in the future.

• Stress testing also offers an effective means by which regulators can ensure that firms are strong enough to withstand severe economic scenarios. Whilst Ofgem has announced its plans to introduce stress testing for energy companies beginning in January 2022, energy system stress testing could further enhance the UK’s ability to adapt to rapid changes in energy wholesale prices, demand, and supply.

• The pursuit of greater competition has been a key feature of UK energy and gas markets for over twenty years. Our research suggests that the UK retail energy market may have been characterised by excess entry. The recent wave of supplier bankruptcies and consolidations presents an opportunity to investigate the optimal number of firms needed to promote competition among energy suppliers.

• Energy customers must be a central consideration of retail energy market reforms. Widespread implementation of auto-switching technology could potentially eliminate the need for price caps, and an exceptionally low tariff scheme for the poorest households could fill the gaps in current low-income protection programs.

• There is an opportunity to invest in new flexible storage facilities and infrastructure that can be utilised for natural gas in the short term and transitioned to renewable fuels in the long term – thus becoming a part of a smart and flexible energy future.
Original languageEnglish
Number of pages20
Publication statusPublished - 28 Mar 2022

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