Root and branch reform of UK wholesale and retail energy markets is needed to avoid repeats of impending market failures threatening to pitch millions more into fuel poverty when 50% tariff rises take effect in April, a respected analysis firm warns today.
Cornwall Insight says the Default Tariff Cap and other current solutions only deal with failings in the existing energy market design. At best, delay risks and costs or at worst, they increase them.
Ofgem began consultations in November seeking industry advice on best ways to reform the Price Cap. But the consultants believe the regulator’s remit isn’t wide or deep-seated enough.
To future-proof the sector, safeguarding it against repeated price hikes for consumers and to protect the wider economy, Cornwall Insight recommends:
- Reforming wholesale markets, sharpening their response to balancing costs driven by gas. Shortages of the commodity still imposes pain and destabilisation, but it is becoming progressively less relevant as markets’ replace fossil fuels with renewables amid electrification of heat and transport.
- Regulators understanding better the changing relationship of wholesale prices to consumer costs, and deciding on the fairest route for suppliers to recover of wholesale costs over time
- Step up communications to the public bringing home the muti-generational return on investment that underpins net zero
Cornwall Insight’s CEO Gareth Miller said: “It is not helpful for government to keep pointing to the Default Tariff Cap when pressed on what action it is taking. The cap will not protect consumers from increases in gas and power prices in the long run.
“Certainly, the cap has delayed the burden of these costs to consumers, but they will face them anyway as the default tariff cap rises, in a lag to the rise in gas and power prices.
“We must also remember that the default tariff represents the regulator’s view of a “fair” price for energy, Miller continues.
“So, if that fair price is rising, this suggests the regulator thinks that an appropriate response is for suppliers to be able to charge this rate to consumers. If the costs of supply are rising but deemed fair, but the impacts on households will create hardship, this cannot conceivably be dealt with through the energy bill or market mechanisms. At that stage, the government should attempt to alleviate pressure on vulnerable households through the tax and welfare system”.
Meanwhile social equality think tank the Resolution Foundation today revealed research indicating that the number of households suffering from ‘fuel stress’ – spending at least 10 per cent of their family budgets on energy bills – is set to treble overnight to 6.3 million households when the new energy price cap comes into effect on April 1
Researchers believe the proportion of English households in ‘fuel stress’ is currently 9 per cent. It is expected to leap to 27 per cent as a result of the energy price cap rising by more than 50 per cent this April to around £2,000 per year. Ofgem will announce the new price cap level on February 7.
Adding too to pressure on Johnson and his chancellor, an alliance of 25 British charities, faith and green groups and anti-poverty organisations warn that up to 6.3 million people will be drawn into fuel poverty, if retail tariffs soar by 50% in April as expected on the back of Ofgem’s increased price cap.
Ironically echoing the message of direct action protesters for Insulate Britain, the alliance led by Greenpeace and faith group TearFund calls on premier Johnson to mobilise a massive emergency drive in home insulation at scale.
Conservative-led governments since 2010 have cut state-support for upgrading British homes, the alliance assert, leaving citizens at greater risk of soaring gas bills.
“When energy bills surged in 2013, the Warm Front programme to insulate low-income homes was abolished and the Energy Company Obligation (ECO) was cut in half,” it states. “This was damaging and counterproductive, leading to a 90 per cent cut in loft and cavity wall insulation measures, and loss of over half of insulation industry jobs.”