Utility Bidder Energy Insights 2022 - Flipbook - Page 9
Domestic cap
Hedging plays a part in
failure
The domestic caps are set by the industry regulator Ofgem to ensure that
The process of ‘hedging’ has also been
households pay as fair a price as possible for their energy consumption. The cap
the source of some companies and
effectively limits the amount energy companies can charge consumers for each
suppliers failing. Energy customers
unit of gas and electricity they use. However, protecting homeowners has come at
complain that when wholesale gas
a cost. The price cap means that suppliers, if they are forced to buy at high prices
prices are low, they don’t benefit as
to support the demand, are restricted in how they recuperate the wholesale spend,
their supplier never passes on these
particularly when there are unpredictable surges in the market. This has caused
lower costs. However, that’s because
many energy businesses cease trading and it’s likely we may lose a few more in the
many energy suppliers use ‘hedging’
short term.
to minimize their vulnerabilities in a
Now, a customer on a variable deal in England, pays about £1,277 a year. There is a
volatile energy market.
now a separate cap for 4.5 million people on prepayment meters, who pay more for
As you can appreciate, it’s a delicate
their energy. It means a household using a typical amount of gas and electricity pays
balancing act for an energy company
£1,309 a year.
to purchase at exactly the right time,
rather than buying their stock all at
Ofgem has announced that the new cap will increase by 54% when it comes into
once and then selling at a specific
effect on the 1st of April 2022. Customers on default tariffs who pay by direct debit
price – they purchase small quantities
will see an increase of £693 from £1,277 to £1,971 per year. Prepayment customers
in accordance with their needs and
will see an increase of £708, from £1,309 to £2,017. We expect the price cap to be
sell as relative to market price as
reviewed and updated again in October this year. Customers on fixed rate deals will
possible.
not see immediate price rises but they will most likely see their prices increase at
the end of the term. For customers that are looking at the current fixed deals will be
more expensive.
When done correctly, this means
when any major price changes
occur the suppliers aren’t left with a
The chancellor has released a support package to help domestic customers with the
crippling deficit that causes them to
54% jump in energy bills. Prices are increasing quicker that pay, adding additional
lose out and fail to meet the demand
pressure to domestic customers with their household finances. The increase from
of their customers. Too few suppliers
0.25% to 0.5% is set to hit a 30-year high which will also push prices up across the
have failed to hedge correctly and
economy. Inflation, measured using the CPI (Consumer Prices Index), is estimated
meet demand during the energy crisis
to reach 7.25% in April which makes the average for 2022 6%.
leading to many ceasing to trade.
Even though the price cap only applies to domestic bills, suppliers who service both
Not all companies hedge and smaller
the commercial and domestic markets will be required to recuperate costs through
companies who profited from not
other means, including looking to their business customers. As many Utility Bidder
hedging when prices were falling are
customers are SMEs or Micro Businesses, we know that a significant number will
now facing the consequences.
struggle to cope with soaring energy costs both at home and at work.
The spike in wholesale gas prices
Summer 2017
VAT
Winter 2017
Wholesale Costs
Summer 2018
Winter 2018
Other Costs
Time
Summer 2019
Winter 2019
Policy Costs
Summer 2020
Winter 2020
Summer 2021
Winter 2021
Summer 2022
Winter 2022
0
Source: Carbon Brief analysis.
500
1000
1500
2000
2500
£ per year
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