Martin Lewis: 'Ofgem's plans to protect providers' profits from price swings will cost consumers'

Important News: @Ofgem's just launched a 'consultation' about switching on the Market Stabilisation Charge as soon as November. It doesn't sound a big deal, but it could be. It ain't good for consumers and I don't want it to slip under the radar.

In a nutshell, it means if wholesale energy prices drop sharply, the cheap fixes and switcher deals offered will be a lot more expensive, in order to protect energy firms' profits.

That's because any firm taking on a new customer, including on a cheap fix or other specialist tariff, will have to pay compensation to that customer's old supplier, if they switch. It's basically a form of switching penalty.

While technically this is a consultation, it's one of those where Ofgem has made up its mind, but is required to consult – it will almost certainly happen. Below is my 'first look' explainer on this...

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How it works (simplified to make it easy to understand):

Ofgem decided to put this power back into suppliers' licences in May, so it could switch it on quickly if needed, and now it is trying to do just that.

It means if wholesale prices drop more than 10% below the level built into the Price Cap (and remember the January Price Cap is currently predicted to be 25% higher than now), and someone switches supplier from that or any tariff, the new firm must pay the old one 85% of the drop in wholesale rates beyond that 10%.

So very roughly, say the wholesale energy in the Price Cap costs £1,000 (a made-up number, to keep it simple. This is about proportions, not exact amounts):

- If prices drop to £900, there's no Market Stabilisation Charge.
- If prices drop to £800, you get the first £100 drop, but 85% of the next £100 (£85) goes to your old supplier.

So almost certainly the new firm will make you pay the difference, meaning the tariff will be up to £85 more than it would otherwise have been (other factors could affect the amount, but this is a rough illustration).

In other words, the new supplier can't pass a chunk of the saving from lower wholesale rates on to you, because it has to hand much of it to your old supplier.

Why Ofgem says it's doing this

Its argument is that the Price Cap requires suppliers buy energy in advance. If wholesale rates fall sharply and people leave in large numbers, those suppliers would be left out of pocket, and it doesn't want suppliers who did the right thing by buying energy in advance to be penalised.

My view

I don't like it. This is a 'Market Stabilisation Charge' but the supplier market is pretty stable, and I doubt we are at the domino risk of suppliers going bust in the way they did in the early twenties. A good few energy firms have made large profits since then, and protecting them over winter by effectively dampening competition because it's 'not their fault' feels raw.

After all we don't take their profits off them when they make them 'through no fault'. Until now, my hope had been that at some point the Middle East situation would de-escalate, wholesale rates would drop. While it would take months for that to feed into the Price Cap, other cheaper tariffs would be available to switch to. That would still happen, but the savings could be nowhere near as good as otherwise.

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As noted, these are my provisional thoughts and this has only just come out. I will need to do more looking/thinking.