Ofgem said: “By raising the EBIT allowance, Ofgem is taking the next step in its drive to make the retail energy sector more resilient, as we move into another difficult winter when price volatility remains a risk.
“At the height of the energy crisis around 30 suppliers failed because they did not have enough capital in the reserve to stay in business – and the cost was shared among all energy consumers, adding £83 to bills.
“With suppliers only now starting to recoup a portion of their multi-billion pound losses over the past four years, a small increase in permitted profit margins will allow companies to better cover their costs, attract investment and retain financial stability protecting consumers into the future.”
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Simon Francis, coordinator of the End Fuel Poverty Coalition, commented on the matter, expressing his concerns.
Mr Francis said: “When you look at the details of this price cap, the reality is that every unit of energy a customer uses costs double what it did a few years ago. The daily standing charges customers pay have also increased – doubling in the case of electricity.
“The Energy Bills Support Scheme has also been taken away this winter, while energy firms have been allowed to increase the profits they make per customer and vulnerable households have been left wondering what will happen this winter and beyond.
“Ministers had promised to consult on tariff reform to help the households most in need and who most rely on energy to keep themselves safe. Sadly, they have abandoned plans for a social tariff consultation.
“The government seems to be running out of enthusiasm to help people get through the energy bills crisis, and it is also now running out of time to act to keep people warm this winter.”
So how does this work?
OFGEM wants a competitive market with many competing (and often smaller) energy suppliers. However they saw that last time around these would operate on tiny tiny margins that weren't resilient to wider shocks in the energy market. So they failed on a massive scale and effectively everyone had to pick up the slack hence the adding £83 to bills bit. The answer as they see it is to allow them to operate on larger margins so they can become resilient over time? If they still fail they fail but they should have the requisite reserves such that the whole market doesn't take a hit as a consequence of one supplier failing? Is that about it? Basically?
Sounds similar to the aftermath of the banking crisis in 2008. They operated on risky faulty assumptions with little margins that weren't resilient to a huge shock. As a result we had to bail them all out. What happened on the intervening years is that that market has been told to build up massive reserves to be resilient to another shock. Banks and building societies and asset management companies go through stress testing each year and effectively wargame these scenarios. Quite often the FCA tell them to up their reserves. If OFGEM does the same I can kinda see the logic to this and don't actually mind. It stands to reason that to be resilient you need to invest. That has to come from somewhere right?
But is that too narrow a reading? What do others think? The article is fairly light on details.