The British government is fast approaching the moment when a crisis rooted in the shaky world of retail energy market regulation turns into a cost-of-living scandal as the results end up squarely on household accounts.
Regulator Ofgem’s poor selection and supervision of entrants to the UK’s energy market lie behind this fuck. It will announce the new level for the domestic energy price limit in early February.
According to some analysts, bills could rise from £ 700 to around £ 2,000 as rising wholesale prices for gas and power are passed on to consumers. Some customers who come down from fixed-rate transactions and reach the limit may find that their bills double.
Boris Johnson this week rejected calls to cut or do away with the 5 percent rate of value-added tax on fuel because he said measures to protect account payers should be targeted rather than spread across the market. That’s right. But so the extent of the problem now is that the reaction must involve some of both.
Without a doubt, support should be trained where it is most needed. The Resolution Foundation (which estimates the increase in accounts at £ 600) point outAgainst a backdrop of rising inflation and higher taxes, this rise will hit hardest in the lower income decile: it could boost energy to 12 percent of their household budgets or three times the level for the upper decile.
The problem is that the possible jump in bills rather dwarfs some of the proposed measures to mitigate it. The various environmental and social levies on bills amount to perhaps £ 140 per household, according to Investec, money that will have to be found elsewhere to finance the greater share of renewable energy needed in the energy mix. Scrapping VAT on both electricity and gas will save £ 95 on bills, but at a cost of around £ 2bn a year to the Treasury.
Axing seems like either a blunt (and expensive) tool unless it can be targeted at lower-income households. It is better to target funds with a reformed and very comprehensive Warm Homes Discount, the existing program that cuts accounts for lower-income households.
This does not mean the rest of the market just suck it up. Twenty-six energy suppliers have failed since August, a result of government policy and weak regulation it ultimately promoted inefficient competitors rather than true competition, according to Nera Economic Consulting. In 2019, for example, the regulator considered limiting providers’ ability to finance themselves from customer credit balances – to reduce both the size and cost of failures – but decided against it.
It’s not clear why consumers should face an affordability squeeze thanks to a regime that included moral hazards and risk-taking, with customers being encouraged to get the cheapest deal from a range of unsustainable, unsecured providers. The current cost of failed regulation is set at £ 70 to £ 100 per household, based on Ofgem’s first £ 1.8bn snail of claims by the last resort provider (SOLR) process. It will rise: more failures are expected and the figures do not include the £ 1.7 billion spent by the government administration of Bulb, the biggest collapse to date.
The idea of smoothing out at least these costs over several years has merit. Agreed consultations have started to allow private financiers to pay companies that take over their SOLR costs from failed competitors, and recover it from network costs over a longer period of time. The same approach could spread the burden of unprecedented increases in energy costs over several years: one issue, ironically, could be to expose taxpayers through treasury-backed loans to the struggling energy companies still left.
The challenge for government and industry is to act quickly, with measures needed before the new price cap takes effect in April. But it would be a mistake to anticipate the more fundamental overhaul needed by Britain’s energy supply and regulation. This is a test that the industry is proposing for a contract-for-difference mechanism to manage wholesale price volatility, a major change that could shift market risk to the Treasury is likely to fail.
Decisions on how to re-regulate the UK energy market will have to be the outcome of a longer, much more daring conversation.