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Energy Price Cap - Energy Chiefs point to regulatory failure

Graham Watson

21st October 2021

The regulation of the energy sector has come under fire from the former Chief Information Officer at Utility Point.

He argues that the regulator, OFGEM, needs to take the blame for making operating in the sector well nigh impossible. He says that the operation of the price cap, far from protecting consumers, made the market well nigh impossible to operate in - in that it effectively meant that companies would inevitably be loss-making when wholesale prices rose, and that other measures, notably to protect disadvantaged consumer and encourage green energy exacerbated this.

It's an interesting perspective but I'd suggest that he's bound to say that - and that he wasn't publicly complaining when earning a not inconsiderable sum when wholesale prices were low. And that is perhaps the point - the distributional effects of the market are such that the interests of consumers and producers aren't terribly well-balanced.

At any given moment one group is gaining relative to the other and rarely are the interests of both groups well served by the current market structure.

Pretty much at the same time, the head of Scottish Power has lashed out at the price cap in energy markets and OFGEM's regulation of the sector, which has recently seen a number of small firms go bankrupt.

He's always going to argue against the former - it reduces his profit - but he might have a point in the latter regard, with many of these small companies effectively acting as no more than intermediaries between energy consumers and suppliers.

Many of the smaller new entrants into the UK energy sector don't generate their own power or have their own distribution network - their business is simply arbitrage between wholesale costs and retail prices. And they have got badly burnt by the surge in the wholesale price whilst under the constraint of the retail price cap.

Graham Watson

Graham Watson has taught Economics for over twenty years. He contributes to tutor2u, reads voraciously and is interested in all aspects of Teaching and Learning.

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