Utility Week

6 | JANUARY 2022 | UTILITY WEEK The Month in Review "I would hate it if we all had to talk to each other because Ofgem told us to. We should be competing with each other. There is a healthy tension … That's what a competitive market is about." Suleman Alli, director of strategy and customer service at UK Power Networks Energy suppliers are to be subject to financial stress testing from this month (January) as part of a ra of new measures being taken by the regulator in response to the fallout from high wholesale prices. The move comes as the regu- lator's chief executive, Jonathan Brearley, admitted previous measures brought in by Ofgem were underdeveloped and had been "overtaken by the speed of change in energy markets". Ofgem said it envisaged these initial stress tests would take the form of a number of "what if " scenarios, which are likely to cover price volatility, differing levels of customer bad debt and significant acquisitions or loss of customers. Suppliers will be issued with a request for information and Ofgem will then undertake stress testing on the data provided, test its results with the supplier and adjust the findings as appropri- ate. Where any issues are raised from testing, Ofgem said it would identify a suit- able improvement plan for the supplier to rectify them, with the possibility of enforcement action if this was not agreed or followed. Ofgem said it anticipated this being the start of a series of stress-testing exercises, adding that it would adapt the design of the tests over time. Domestic suppliers will be prioritised and the regulator plans to next consider the best approach to non-domestic retailers. Ofgem sets out stress tests for retailers to shore up resilience The other components could be updated on a six-month cycle, as they are currently. Furthermore, Ofgem said, this option could also be configured based on 12-month contracts or with the price cap level set using 12-month forward prices, which would deliver more price smoothing for consumers and remove the seasonal impact. Other options suggested in the document include a "circuit breaker", which retains the existing methodology but includes an enhanced ability to adjust the cap in extreme circumstances. Ofgem is already consulting on a potential price cap reopener, enabling it to adjust the price cap level outside of the current six-month cycle. A stronger version of this could potentially be introduced, with criteria specified in advance such as a specified gap between the standard variable tariff and market prices, in either direc- tion, that would trigger a change in the cap level. A further option being pro- posed is to update the wholesale Radical shake-up of default tariffs Ofgem also has proposed intro- ducing six-month default tariffs for customers, similar to fixed mortgages, as a possible adapta- tion to the price cap. In a call for input, Ofgem outlined three potential changes that could be made to the cap methodology. Under the option for a six- month default tariff, there would be a window when each contract renews where a customer would be able to either switch or select a different tariff. Outside of this window, exit fees would apply. Ofgem said the exit fee could be set at the economic cost determined at the point the customer leaves, meaning it would decrease in amount over the contract period. The wholesale component would be the observed price of the six-month hedges during the month prior to the start of the default tariff. This price would be fixed for the contract term but a new price would be set each month for new customers. Brearley: previous measures have been "overtaken by the speed of change in energy markets" cost components of the cap quarterly using the existing cap methodology and the average forward prices for energy deliv- ered in the coming year. Loyalty penalties in the crosshairs In a separate intervention, the regulator is considering requiring energy suppliers to make all new tariffs available to their existing customers as one of several possible short-term interventions to help them bet- ter manage the risks of buying energy. The move is one of three options Ofgem is proposing and would be limited until the end of September 2022. It is also looking at allowing suppliers to charge exit fees on certain standard variable tariffs (SVTs) as is already common- place for fixed-term contracts. In its rationale, Ofgem noted suppliers will usually have hedged to supply the expected demand from SVT customers. If market prices fall, the regulator said millions of these customers may move to fixed deals, leaving suppliers unable to cover the costs of their hedges. The third option is to require retailers to pay a "market sta- bilisation charge" to the losing supplier when acquiring new customers. This charge would represent a proportion of the economic loss to the losing sup- plier when the switch occurs and would be based on customers' estimated annual consumption. The regulator would set the

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