Utility Week

UTILITY WEEK | DECEMBER 2021 | 19 Policy & Regulation Interview T here have been many victims of the turbulence in energy retail over the past few months. But for the market as a whole the fallout could ultimately be "hugely beneficial", according the Martin Young. The senior analyst at Investec tells Utility Week the crisis, which has contributed to the failure of 24 suppli- ers so far this year, should "hopefully mark the end of this insane desire for switching for switching's sake". "If you went back in time, there was a narrative from Ofgem where they said by switching supplier you could save £200 or more," he says. If you stripped out the profit margin and headroom from Ofgem's stack of costs for calculating the price cap, and even imagined an "extreme situation" in which sup- pliers had no operational costs, Young says "you would still not get to a level where you could save two or three hundred pounds versus the cap". The regulator was therefore "providing oxygen to companies that were loss-making". "Hopefully this massive wake-up call leads govern- ment to realise it's wrong with this idea of opt-in/opt-out switching – so let's get rid of that as well – and let's get on to the real thing that we need to do here, which is we need suppliers who do more than offer you electrons and molecules." He continues: "We have to move to energy as a ser- vice and I believe shaking the tree, getting rid of the dead wood, the poorly run companies, the financially unsus- tainable companies, ultimately gets us to a better place. "How many people do you need for competition? If you are down around the 20 mark surely that is still enough to have competition in the energy market." Young welcomes Ofgem's recent announcement of a series of actions it is taking in response to the crisis, including expediting Last Resort Supply Payment claims by suppliers of last resort. "In the past we were generally dealing with small numbers that, by and large, related to the parts of the consumers' credit balances that the supplier of last resort wasn't willing to bear on their own accounts," he says. "But those were relatively small numbers and clearly the supplier of last resort would have been able to provide liquidity to fund those, so tim- ing wasn't necessarily an issue in the past." He says this isn't the case now that suppliers are claiming for wholesale energy costs that they are unable to recover because of the price cap. "As we all know, the commodity costs are higher than the commodity costs allowed for at the current level of tariff cap and a supplier of last resort is having to provide liquidity for that particular cost," he says. "Speeding that up so they get their money sooner rather than later is 100% sensible." Young similarly welcomes Ofgem's plans to review the methodology for setting the price cap: "That's a question of the mechanics of the cap, the nimbleness, the frequency of the updates and so on, so presumably you should be able to do something that addresses these seismic changes we see in the component parts of the stack that go to form the tariff cap. "You would question why it wasn't stress-tested to that extent at the outset, but maybe nobody anywhere foresaw prices of this ilk for a sustained period of time." He believes there will be challenges in transitioning from one methodology to another "because if you think back to the beginning of the tariff cap where British Gas was joined by others in a judicial review against Ofgem changing its mind at the eleventh hour, it shows you the pitfalls of making a change when large parts of the industry will have gone down a particular route in terms of commodity and price hedging". "How do you flag change sufficiently far in advance that you avoid that problem, but isn't so far in advance that it doesn't address the problem that you're facing in the here and now?" Despite its imperfections, Young believes the price cap has been good for the industry, pushing legacy sup- pliers like British Gas, Eon and EDF – the last of which recently announced plans to adopt Octopus Energy's Kraken platform – to drive down their operating costs and become more efficient. "If the tariff cap has forced changed in that respect, then the cap has done some- thing that is clearly beneficial," he says. Tom Grimwood, news editor "Getting rid of the dead wood ultimately gets us to a better place." Martin Young, ANALYST, INVESTEC "Hopefully this massive wake-up call leads government to realise it's wrong with this idea of opt-in/opt-out switching – so let's get rid of that as well."

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