What will happen to the energy price cap?

Every customer taken on through the collapse of smaller energy suppliers costs firms £1,000 at the current level of the cap. It’s a matter of time before something gives, writes James Moore

Pricey stuff: now Scottish Power is calling for the cap to end (PA)

It’s time to scrap the energy cap, the boss of Scottish Power told the BBC, although he didn’t quite use those terms.

With smaller suppliers going bust every few days, the big guns are having to take on a raft of new customers. CEO Keith Anderson said each new one was costing his company £1,000 under the cap. He put the total cost to the industry at up to £5bn.

You probably know the background by now. A sudden spike in global gas prices has left the UK’s domestic energy sector flailing. The cap means customers are paying less for their energy than it costs to supply.

As a result, smaller suppliers’ business plans have become spattered with red ink. Each time one gives up the ghost, Ofgem is left scrambling to find new providers for their worried customers.

Those with Goto Energy, a supplier of green energy which gave up the ghost on Monday, have just landed with Shell, an oil major, although Shell Energy says Goto customers will be put on its Flexible 6 tariff, “which includes 100 per cent renewable electricity as standard”. So there’s that.

Anderson took a clear shot at the regulator, which, he claimed “has not kept pace with what has been going on in the marketplace”. He also took aim at “a raft of small, not particularly well-run organisations coming into the retail sector”. Ouch.

If things don’t change, he warned, we’ll be back to the oligopoly of just the “big six” energy firms. He wants the regulator to take a much harder look at the business models of new entrants in future.

Look, we’re working jolly hard with the government and industry to make sure consumers are protected, said Ofgem, in response. We have “robust systems in place”.

“The price cap will remain in place this winter to protect millions of people from the sudden increases in global gas prices. We are also working with government to ensure that we have a sustainable energy market that works for all customers.”

So the cap isn’t going anywhere. But it is inevitably going to rise in the spring and perhaps by quite a bit.

Whether it will rise by enough to stabilise the market while still protecting vulnerable consumers who are getting hit from all sides (surging inflation, cuts to universal credit, tax rises) is an open question.

But at the same time, we shouldn’t forget the reason for its imposition in the first place and we shouldn’t forget the reasons for Ofgem encouraging new suppliers into the market, even if some of them have proved shaky.

It had become horribly complex and as a result consumers, especially poorer consumers, proved reluctant to switch despite regulators and consumer groups urging them to take advantage of the better fixed-price deals that were available. There was a bewildering array of them. Making sense of it all was too much. Even though it is now simpler, it still sometimes feels a bit like walking into a minefield.

The big suppliers were thus able to sit back and milk millions of customers through the pricey standard variable tariffs they were on. Customer service was poor, and that’s putting it mildly. Horror stories involving billing regularly appeared in the media.

This is not an industry it is easy to feel sympathy for. Its previous poor behaviour is a contributor to the current mess. It forced the regulator’s hand.

That said, Anderson wasn’t wrong to raise the issue of suppliers’ loss-making.

Under the current rules the big guns have to put in bids for the customers of collapsed suppliers so those losses are mounting and there is probably more to come.

Behind the scenes, Ofgem is talking to suppliers about their ability to weather the current storm. As a last resort, provisions are in place for administrators to be appointed to run collapsed firms. I also understand plans are in place should one of the giants walk away. But such an event clearly represents a nightmare scenario for Ofgem. It could get very messy very quickly.

Could we see an unscheduled increase in the capped price? This is an idea that has been floated. But such a move would be politically explosive. Getting rid of the cap, as Anderson desires, even more so. The policy is a popular one. The opposition would jump on its failure.

The industry, the government and Ofgem are thus sat around a poker table. They’re all lacking chips and they’re all playing bad hands. They’re all staring at each other while crossing their fingers in the hopes that the international gas market sorts itself out. That is not a winning strategy.