Britain’s energy regulator warned suppliers on Tuesday not to boost investor returns at the expense of consumers, urging them to ensure sufficient capital to protect against volatility.
The retail fuel market is expected to return to profit for the first time since 2018, with wholesale prices “significantly stabilised” after peaking in the second half of 2022 and early 2023 , Jonathan Brearley, CEO of the Gas and Electricity Bureau. Markets (Ofgem), wrote in an open letter to suppliers.
Producer price inflation (PPI) for oil inputs fell 34.7% in the year to May and 10.4% month-on-month. “Crude oil made the most significant downward contribution to the annual rate of PPI inflation to May 2023,” Ofgem said in an inflation bulletin update on 21 June.
Meanwhile, the 12-month rate of consumer price inflation for household energy, water and housing eased only narrowly to 12.1 percent in May from 12.3 percent of April in relation to producer inflation. Transport inflation, as measured by the consumer price index, fell to just 1.3 percent in the year to May from 1.6 percent, the agency said in the 12 months to April.
“The relatively high contribution to the [overall consumer inflation] From April 2022, the levy comes mainly from electricity, gas and other fuels. The contribution from this group reflects the increase in gas and electricity prices in April and October 2022, following the increase in the limit of the Office for Gas and Electricity Markets (Ofgem) to energy prices, offset in part by the government’s Energy Price Guarantee (EPG),” the ONS said. The EPG, which ended in April, set maximum prices for electricity and gas for homes.
However, the contribution of domestic energy, water and housing decreased between March and April, mainly due to the slide in the price of electricity and gas between these months, but which increased in 2022.
For the third quarter, Ofgem has lowered its maximum price to reflect recent falls in wholesale prices. The annual amount that providers can charge the average household has fallen to around $2,640 (GBP 2,074), from around $4,170 (GBP 3,280) between April and June, Ofgem said in a press release on 25 May . The adjustments are based on the typical consumption of dual fuel households paying by direct debit.
But the bureau warned that the price cap “is still above pre-energy crisis levels, meaning many households could still struggle to pay their bills”.
“Although the price cap has come down from its winter peak, it remains well above the pre-2021 average, and many people will still find such high bills difficult to pay,” Ofgem said.
Ofgem has taken a number of measures to help providers stay afloat, including through the so-called market stabilization charge, Brearley noted in the letter. Through the charge, a company that acquires a customer from another supplier must compensate the rival at the consumer’s expense if the consumer switches suppliers before using the energy that the original supplier bought at high wholesale prices.
Following a consultation which closed in May, Ofgem is now looking to implement its capital adequacy requirements, which require a certain level of capital before companies can pay back dividends. “There are still some providers that need to build capital post-crisis and therefore should not return dividends until they do. The final capital adequacy requirements will go to Ofgem’s Board later this month ” Ofgem said in a press release on Tuesday.
Following the reduction in wholesale energy prices, Ofgem is “reorienting the focus of retail regulation to adapt to the changing situation in the sector”, Brearley said in the letter.
“We closely monitor risk-taking to ensure that suppliers are financially resilient enough to absorb potential losses in a wide range of scenarios and that they meet our principle of enhanced financial responsibility,” he added.
“While we are looking at some good practice, we are also finding evidence that some suppliers may have breached our pricing rules, which we are investigating further and taking action if we find abuse,” the Ofgem boss said.
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