07 Oct Gaslighting the Gas Crisis;
A response to the Energy Price Guarantee, Energy Support Scheme and the measures the UK government is taking to tackle the Gas Crisis
I rarely get the opportunity to comment on current affairs. The mixture of a dynamic business and young family normally prevent me from doing this. As a pragmatic person I have also steered away from political discourse and find the politics of opposition unhelpful and divisive. This blog and the articles which we have distributed have always had the intention of providing useful information about issues that surround the High Wycombe property market. I break all these rules today.
On the 26th of August the Office of Gas & Electricity Markets (OFGEM) published a Press release announcing its intention to raise the Default Tariff Cap Level for the period 1st October 2022 to 31st December 2022. For the majority of customers who pay for dual fuel consumption by direct debit they calculate that the typical use would increase from £1971 per annum to £3549 per annum. A common misconception (ironically the Prime Minister tripped up on this on last Thursday’s round of interviews with local radio stations) is that the ‘typical use’ is not the maximum a customer will pay. Instead, it is what the regulator anticipates a ‘typical user’ will pay across the year. In reality an increase in the price cap is an increase in the daily standing charges and unit rates that energy retailers charge for gas and electricity. The energy retail market is arranged to charge customers more based on the amount and time of usage. Equally OFGEM allocates a rateable value for all the different payments and a mixture of fuels as we find the prices actually paid by these consumers higher than the cited £3549 figure. I believe energy for domestic customers at this price becomes unaffordable and challenges the very fundamentals of essential use.
OFGEM introduced the very first price cap on default energy tariffs on the 1st of January 2020. This was a direct result of the Competition and Markets Authorities investigation into the Energy Market. The investigation highlighted how vulnerable (or ‘sticky’ customers) were being overcharged on the standard variable tariffs set by the energy retailers. Customers that did not regularly switch suppliers or sign up to fixed rate tariffs were paying substantially more for their energy than customers who did. In effect the price cap was intended to be used as a safety net. Ofgem were essentially providing a framework to penalise customers that did not switch supplier. If you look at transfer rates over the last ten years, we only see a brief high of 20-21% in 2019 and 2020. (Notably it has dropped to 15% for electricity and 12% for Gas). Although transfers may be a result of home moving, I struggle to see how this low consumer engagement has been adequately addressed by the regulator. I will also note that in 2018 when switching started increasing we also saw ten suppliers go into insolvency. I further note that this protection was only limited to domestic customers.
Last year, following shock increases in the wholesale price of gas we wrote to you on the 14th of October 2021 and outlined how the default price cap was becoming the default tariff for new customers. As we enter the second winter of this wholesale gas crisis, domestic customers who’s fixed rate tariffs have ended have all fallen onto the default price cap. We now know the scale of these failures. Citizen’s Advice produced a report in December 2021 which estimated almost 4 million households saw their supplier fail in 2021. When a supplier fails Ofgem steps sin and allocates customers via a sales process known as the Supplier of Last Resort (SoLR). Unfortunately, the largest supplier to collapse last year ‘Bulb’ could not be dealt with in this way and effectively is being run via court order to ensure supply is not affect to its customers and a cost that has not yet been determined. These processes form part of the increase that consumers are now facing in their energy bills.
The energy price guarantee came into effect on the 1st of October 2022 for domestic consumers. Although it is not as high as the proposed default tariff cap Ofgem had proposed. It is still another increase in the standing charges and rates applied to energy. This rate rise comes in the last quarter of the year where usage is at its highest. The simplest way of outlining the increased cost is by taking an accurate bill from 1st October 2021 to 31st December 2023 and doubling it. I sat down with a colleague of mine who lives with two other adults in an average three-bedroom semi-detached house. I would classify their usage as moderate as one adult works regularly from home. When you add up the daily standing charges and based on the units consumed last year in October/November/December their bill for consumption is around £600-700pcm for this period of the winter. For large homes with poor insulation this figure will be higher. Although the market was designed to penalise high users with a higher cost it becomes problematic when high cost undermines essential use.
When I wrote last year about the gas crisis in October 2021 Russia had not invaded Ukraine. I loosely referred to some of the causes of the increase in wholesale gas prices. I wrote about poor gas storage resulting in a vulnerability to wholesale markets. I wrote about an increased demand in a post covid world. I wrote about a failure of regulation. In spite of this we have seen a sharp increase in wholesale Gas prices following the war in Ukraine.
The government has said. . .
“We have seen an unprecedented rise in energy prices following Putin’s illegal war in Ukraine, which has affected consumers up and down the country and businesses of all sizes.”
“Mr Speaker, let me start directly with the issue most worrying the British people – cost of energy. People will have seen the horrors of Putin’s illegal invasion of Ukraine”
“All of this has left us vulnerable to volatile global markets and malign actors in an increasingly geopolitical world. That is why Putin is exploiting by weaponizing energy supplies as part of his illegal war on Ukraine.”
Although the Russian war with Ukraine has had a dramatic impact on wholesale gas prices, it is not the complete story. The crisis in energy is far more nuance (which I wanted to demonstrate above) and deserves a more sophisticated national debate. W acknowledge that the Energy Price Guarantee has prevented a complete meltdown in the UK. In my opinion it has added a dangerous complacency to the debate about the energy crisis in the UK. We are in a national crisis where even the regulator has warned that we could face situations this winter where there is not enough gas supply. At the time of writing, we await the fiscal statement at the end of October on the cost of the downward price tariff. We await details of the Energy Task Force (I hope the government is not referring to the Review of Energy Market Arrangements). We await details of additional licensing. We await details on amendments to the existing Contracts for Difference Schemes and we are extremely alarmed that the target to net xero has been moved back 20 years to 2050!
I openly confess that I am not an expert in the field of energy and would not dare claim to be. Thankfully I am informed by true experts in their field. I want to take this opportunity to thank Cornwall Insight for the work they do in previously predicting the price cap level. (It is how we know that the true cost of energy by January might hit the £6000). (It is also how we know that the cost of the downward price tariff could be between £72bn and £140bn) I am also of the opinion that the only deliverable policy that can have an impact on this winter is a new CFD licensing and an upward wholesale price cap to minimise the cost to us all.
The Office of Gas & Electricity Markets, Ofgem updates price cap level and tightens up rules on suppliers [website], https://www.ofgem.gov.uk/cy/publications/ofgem-updates-price-cap-level-and-tightens-rules-suppliers, (accessed 26th August 2022)
The Office of Gas & Electricity Markets, Energy Price Cap Explained [website], https://www.ofgem.gov.uk/sites/default/files/docs/2020/07/ofg1125_price_cap_info_sheet.pdf (accessed 1st October 2022)
Competition & Markets Authority, Energy Market Investigation; Summary of Final Report [Website], https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/531157/Energy-final-report-summary.pdf, 24th June 2016, (accessed 26th August 2022)
Gov.uk, Energy Price Trends [table], https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachement_data/file/1086579/table_271.xlsx, (accessed 26th August 2022)
Abby Jitendra, Alex Belsham-Harris, Connie Thorn, Maisie Gibson, Citizens Advice; Market Meltdown How regulatory failures landed us with a multi-billion pound bill. [Wesbite] https:/www.citizensadvice.org.uk/global/citizensadvice/energy/market%20-%20Dec%202021_v2%20 (1).pdf
, December 2021
Department for Business, Energy & Industrial Strategy, Energy Bills Support Factsheet [website], https://www.gov.uk/government/publications/energy-bills-support/energy-bills-support-factsheet-8-september-2022, (access on 1st October 2022)
Jacob Rees Mogg, UK Government Takes Next Steps To Boost Domestic Energy Production [Website], https://www.gov.uk/government/news/uk-government-takes-next-steps-to-boost-domestic-energy-production, visited on 22nd September 2022
Kwasi Kwarteng, The Growth Plan 2022 Speech [website], https://www.gov.uk/government/speeches/the-growth-plan-2022-speech, visited on 25th September 2022
Cornwall Insight, Counting the costs: forecasting the financial impacts of the Energy Price Guarantee on the UK government [website], https: www.cornwall-insight.com.wp-content/uploads/2022/10/EPC-Insight-Paper-2022.pdf, Accessed 6th October 2022
UK Energy Research Centre, Can existing renewables and nuclear help keep prices down next winter? The case for a ‘pot zero’ CfD auction [discussion paper], https://d2e1qxpsswcpgz.cloudfront.net/uploads/2022/04/UKERC_DP_Can-existing-renewables-and-nuclear-help-keep-prices-down-next-winter.pdf, (accessed 1st June 2022)