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Ofgem sets a price cap for a standard variable tariff (SVT) that is the maximum price an energy company can charge the consumer for a standard tariff. Fixed rate tariffs are treated different, so are excluded from this cap.
Energy is a pretty competitive market, with little to really differentiate the providers as the goods delivered are pretty intangible. thus consumers are very price sensitive, and will go for the cheapest option. This used to be a fixed rate (2 year fixed often), that guaranteed the suppliers regular income so they took a loss on energy in test 1, to make margin on year 2 due to hedged energy purchases. However, the current climate means that the cheapest tariff is the variable tariff as the cost of energy has risen to such an extent suppliers are increasing their fixed rate tariffs to maintain margin. As they can’t raise the svt above the price cap, this is now the cheapest tariff in market, and is a loss making one for suppliers.
So it’s partly the regulator not allowing higher costs to be passed on to the consumer and partly the govt protecting the consumer from excessive bills. Normally the price cap works, and is based on the cost of energy + x% to allow suppliers to make money from it but with the 70% increase in wholesale prices since the cap was announced in July it’s no longer valid.
If the price cap was calculated know it would be nearer £1700 vs the £1300 it will be from Oct simply due to August price increases.
C4r1s-
Aah - thanks for the explanation. The cap was a piece of information that I was missing.
However, I'm still surprised that the regulator didn't force them to hold the capital to cope with this. For example, the price rises are significant, but it's not unprecendented (for example, post Fukushima in Japan, gas prices rose 80% or something insane as the nuclear plants were all turned off).
Why wouldn't they hold the risk?
I'd just assumed that regulators wouldn't allow them to given that their role is to supply an essential service, or would insist on them holding sufficient capital. Maybe they do and this is one of those 99.99th percentile events that they can't cope with. Maybe the holding of capital isn't even a thing the energy regulator can insist on - it's not something I know a lot about.
christianSpaceman
Why are they collapsing? Is it a regulator fail?
High wholesale prices I get but why are the commercial providers the ones allowed to hold the exposure to that, I'd assumed (presumably wrongly) it's their business to ship the stuff to consumers rather than to hold risk positions.