Energy firms suggest a wholesale price mechanism

According to the Financial Times, energy industry executives have said a number of proposals have been put forward to ministers as they continue to press the importance of supporting the industry. 

One such proposal that has been pitched is a mechanism similar in design to the “contracts for difference” subsidy scheme designed to support renewable energy. Under this mechanism, ministers would have to agree with the energy industry a wholesale price level that they believed consumers could tolerate - and if prices rose above that level, suppliers would receive payments from the government. 

Several people with knowledge of proposals also told the Financial Times, when wholesale prices were below the agreed level, suppliers would return money to the government, meaning the mechanism could potentially be “self-funding”. This option is however unlikely to be popular with MPs who oppose government intervention in free markets. 

Since the start of 2021, more than half of suppliers in the energy market have gone bust - with the latest being Zog Energy which had a combined total of 11,700 customers. This dramatic drop in providers has been driven by the UK’s record wholesale gas prices, reaching as high as 450p per therm just before Christmas. 

These record costs, according to energy market researcher Cornwall Insight, could lead to the winter 2022-23 default tariff increasing to approximately £2,240 per annum. This is just under a £1,000 higher than the current £1,277 per annum price, which is itself a record high.

In addition to the 27 suppliers that have gone bust since the start of 2021, Bulb - the UK’s seventh energy supplier - has entered into special administration. Towards the end of November, the government announced it had set aside a £1.69bn loan to support the company. 

According to the Financial Times, even “well-managed” suppliers have been struggling with the cost of buying energy for customers at times being as much as £1,000 above the price they can charge households via the price cap. 

Energy executives stressed that several interventions would probably be needed to avert the wholesale price crisis from hitting households this year, including reducing value-added tax on energy bills. 

The UK business department told the Financial Times that meetings between the government, industry and Ofgem would “continue over the coming days and weeks to ensure UK consumers are protected”.