Costs related to energy firms "rehedging" customers from companies that went out of business have accounted for the "vast majority" of the supplier of last resort (SOLR) levy component of the UK's retail energy price cap, regulator Ofgem's chief executive Jonathan Brearley has said.
Around 85pc of the SOLR levy stemmed from this "rehedging", Brearley told the House of Commons' business, energy and industrial strategy (BEIS) committee today.
When a supplier goes out of business, the regulator will look for an SOLR to take on its customers. This supplier will be able to set a new tariff for the customer but can claim back "reasonable additional, otherwise unrecoverable" costs from Ofgem that are associated with this, the regulator has said. These claims are paid to the SOLR by the network operators, which in turn recover the costs incurred from consumers through the energy price cap's network component.
Almost 30 suppliers have gone out of business in recent months, largely as a result of wholesale gas prices climbing to historic highs. Suppliers failed to hedge against the sharp increases and the energy price cap prevented them from passing the higher costs on to consumers. The majority of insolvencies occurred in September-October.
And the possibility for SOLRs to rehedge customers from companies that went bankrupt — with the possibility of claiming back the money — may have contributed to wholesale prices increasing and consequently to further insolvencies. Prompt and near-curve prices on the NBP and other European hubs climbed to record highs in early October, although they were subsequently surpassed again in mid-December.
And Ofgem is considering changes to the SOLR levy.
The regulator has launched consultations over a scheme that would allow SOLRs to take out third-party financing for the costs incurred in taking on customers of failed energy suppliers and to pass the charges on to retail consumers over multi-year periods. This could smooth the effect of the claims from SOLRs over a longer period. This may raise total charges for consumers because of the financing costs incurred but it could be balanced against the benefit of lowering costs in the short term, Ofgem said.
The regulator in December set out a series of proposals intended to shore up the resilience of utilities supplying gas and power. This includes the introduction of stress tests to assess whether firms can withstand a range of market conditions from the start of this year.
Brearley said today that checks on the financial resilience of suppliers should have been made tougher sooner. But the priority had been on enabling smaller suppliers to enter the market in a bid to enhance competition, he said. He added that further reforms of the energy price cap may be required.
Ofgem had proposed some changes already in December, including to review the prices on quarterly basis — rather than every six months — while it has also sought permission to make ad-hoc changes in exceptional circumstances.
The standard dual-fuel price cap for a direct debit customer will rise to £1,971 from 1 April from £1,277 this winter. Higher prices on wholesale markets account for the vast majority of the increase and the wholesale component will make up more than half of the total price cap.
