It is time for a fundamental review of how the UK energy supplier market operates

Flawed policy has made the energy crisis worse in the UK than in other countries – but ministers have so far failed to face up to the issues, writes Ben Chapman

The energy price cap is calculated twice a year based on market rates that are months old, meaning it cannot keep up with rapid price changes (Getty/iStock)

With households facing soaring bills, the government can no longer ignore calls to fix the UK's broken energy market.

The average household is expected to be hit with a £700 increase to its energy costs in April, an amount many will struggle to absorb – particularly at a time of rising taxes, falling state benefits and a struggling economy

The crisis of sky-high wholesale energy prices is a global one, but the UK has been uniquely impacted – a fact that the government has refused to acknowledge.

Nowhere else have 26 energy suppliers gone out of business within weeks; no other European country has so little capacity to store gas while also being so reliant on imported gas to heat its homes.

Ironically, ministers have been temporarily shielded from the political damage of energy prices thanks to flaws in their own energy policies.

The energy price cap limits the amount suppliers can charge customers on standard variable tariffs. It is calculated twice a year, meaning most people will not be clobbered with the full impact of higher wholesale gas prices and failed suppliers until April.

While the aim of protecting vulnerable consumers from exploitative pricing may be laudable, the cap is a blunt instrument. It applies to millions of people who aren't vulnerable but who do not shop around for better deals.

It is calculated twice a year based on market rates that are months old, meaning that it cannot keep up with rapid changes in prices. Suppliers therefore need to keep enough money in the bank to cover those changes, which might mean they have to pay a lot more for gas than they are allowed to charge customers for. Some have not done this.

A decade of deregulation in the energy supply market has compounded the problem. Relaxing rules for new entrants was meant to give customers a better deal by increasing competition for the “Big Six” suppliers.

“Light-touch” oversight by Ofgem certainly achieved the government’s aim of allowing dozens of new companies to enter the market but consumers have not ended up with a better deal. Instead we will be paying the price.

Some suppliers offered deals that they potentially could not afford in order to attract more customers. Several companies routinely built up excessive credit balances with their customers and used this money to fund day-to-day activities. When they went bust, those credit balances are ultimately covered by all energy customers, who pick up the tab through a “mutualisation” process.

Some have gone to the wall because of the simple economic reality that you can't keep on selling a commodity at significantly less than you paid for it.

So what to do? In the short-term, cutting VAT to zero on household energy bills would help ease the pain for households. The government could go further and follow other European countries that have offered rebates to people affected by rising bills.

It could, as E.On has called for, use public funds to smooth out the current spike in energy prices and it could ask consumers to pay the costs related to failed suppliers over a longer period of two or three years instead of one.

Some action has been taken. Several years too late, Ofgem has said it will be tougher on suppliers to ensure that they have enough capital to survive periods of volatile prices.

But there are more structural issues to confront. First, the idea that deregulation and market forces are the answer to every problem has been found wanting, especially in the context of essential goods like energy and water, which are natural monopolies.

Where the government did attempt to soften the impact of market forces on hard-up consumers, it did so in a clumsy way with a poorly designed energy price cap.

There are growing calls for a more fundamental reassessment of how the UK energy market functions. It's time for ministers to start listening to them.