In less than a fortnight, Ofgem’s chief executive will set the price that 29m households will pay for their gas and electricity this winter – but Jonathan Brearley appears unconvinced that the energy price cap is the best way to help hard-pressed bill payers.
In what could herald a shake-up of Britain’s energy market, Brearley is calling on ministers to rethink whether the “very broad and crude” price control used to keep bills in check for the past four years is still fit for purpose in a market upended by the energy crisis.
In the past two years, wholesale market prices reached record highs, pushing up the number of households living in fuel poverty to almost 7.5m and causing the collapse of almost 30 energy suppliers. The crisis triggered one of the biggest government bailouts since the financial crisis as ministers handed £78bn to households to help pay their bills.
“The price cap was designed for a market that was much more stable – so, pre-2020 – and it worked quite well,” says Brearley. “But in this volatile market, the price cap has costs as well as benefits, so we would welcome a debate on the future of pricing regulation.”
His call for a “more rigorous framework” to support households comes amid growing concern in some quarters that the energy price cap, legislated by the government in 2019, may now be doing the market more harm than good.
“It’s not for us to decide,” he says. “It’s ultimately for ministers. But it’s important that collectively we understand that a very broad and crude mechanism is going to have risks as well as benefits.”
One solution that has found broad support across the industry and at Whitehall is a social energy tariff. Unlike the price cap, the tariff would be set below the cost of supplying energy, so that households in fuel poverty could better afford their bill.
“We work with government on all options, including a social tariff,” says Brearley. “I think we are clear that a more rigorous framework of providing support for customers is needed. But, in a sense, I accept that the government has a set of dimensions to think about that I don’t have to think about.”
The energy price cap was designed to put an end to rip-off energy tariffs by fixing how much suppliers can charge based on an estimate of their costs. But as costs have soared, the cap has offered little protection against the rise in bills for the millions plunged into fuel poverty. In an energy crisis, a fair price is not the same as an affordable one.
There have been unintended consequences, too. The price cap has been blamed for the collapse of almost 30 small suppliers, at an estimated cost to households of £2.7bn, because they were forced to sell energy at a loss for months before the price cap was updated.
“The truth is, in a market that was more stable, the price cap did its job,” Brearley says. “The way it’s configured right now is one that is hard to adapt to the world changing around us.”
Ofgem has since tweaked the price cap to allow suppliers to recoup the losses sustained last year and remain attractive to investors in the future. The change handed suppliers record earnings for the first half of this year, igniting fierce criticism from consumer groups.
However, Brearley insists that it was the right thing to do. The price is designed to allow suppliers to recover reasonable market-wide costs, and the sudden market price increase had not been taken into account, he says.
“The question is, and it’s an open question: are there alternatives? Are there other ways of doing the same thing?”
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This question runs through the core of Brearley’s leadership at Ofgem, which began in early 2020. Since then, the industry has been roiled by the impact of the Covid pandemic and the energy market aftershock following Russia’s invasion of Ukraine.
Today, millions more households are in fuel poverty, vulnerable bill payers have been forced on to prepayment meters, small businesses have fallen prey to predatory energy brokers, and Britain’s creaking electricity grids face decade-long queues of renewable energy projects waiting to connect to the power system.
Britain’s power grids, which are regulated by Ofgem, have warned renewable energy developers to expect a 10-to-15-year wait to connect their projects to the network. The delays threaten the government’s clean energy targets and put much-needed investment in the UK at risk. Critics of the regulator blame its failure to keep pace with seismic changes to the industry.
“As a regulator, without a doubt, we’ve had a whole lot more to do, and a market that was very different from the one we envisaged in 2020,” Brearley says. “But now, as the market stabilises, we need to think hard – with the industry – about what is the right market for the future.”
Ofgem has already set out proposals to protect small businesses and speed up grid connections. It is also investigating British Gas for its role in forcing vulnerable households on to prepayment meters.
But getting ahead of the industry’s scandals before they can emerge requires a careful balancing act between bringing companies to heel and stifling the innovation the industry sorely needs. “Ofgem is far more interventionist today than it was five years ago,” Brearley says. “All we’re pointing out is that there are trade-offs involved. The trick is to get the balance right.”
So, is the energy market working for consumers? “Broadly, I think it is,” Brearley says. “There is a very big conversation that we need to have about what is the right market for customers today, but also in the move to a world where all of us are going to need to use more electricity in our homes and indeed in our transport.”
He adds: “I think it’s clear to me that a lot of change is going to be needed to increase the pace of what we can do. But that change is well under way.”
