Ofgem proposes energy switching charge to stabilize market

Energy regulator Ofgem has published a consultation on a proposal to reintroduce the market stabilisation charge (MSC). The mechanism is designed to prevent energy suppliers from going bust if there is a customer exodus during periods of sharp price swings. Ofgem states it is "preparing for what is likely to be a difficult winter for many households."

How the Charge Works

The MSC would be triggered if wholesale prices fall more than 10% below the level built into the Price Cap. Under this scenario, suppliers who win customers by offering cheaper deals would have to compensate their rivals 85% of the drop in wholesale rates beyond that 10% threshold.

According to Ofgem, suppliers that have bought energy in advance for customers on default tariffs can face losses if large numbers of customers switch to cheaper fixed deals. The regulator argues that the charge helps protect consumers from volatility and ensures suppliers can secure energy without taking unsustainable risks.

Neil Kenward, the interim director general of markets at Ofgem, said: "In volatile market conditions, it’s important that suppliers can continue to secure the energy their customers need without taking unsustainable risks."

Criticism from Consumer Advocates

Martin Lewis, founder of MoneySavingExpert.com, criticized the proposal, stating it "ain't good for consumers." Lewis argues that the charge acts as a "switching penalty" that will "dampen competition" and make tariffs for switchers more expensive.

Lewis explained that if wholesale prices drop, the new supplier cannot pass the savings on to the customer because they must hand a portion of the difference to the old supplier. "The new supplier can’t pass a chunk of the saving from lower wholesale rates on to you, because it has to hand much of it to your old supplier," Lewis said. "The cheap fixes and switcher deals offered will be a lot more expensive, in order to protect energy firms' profits."

Lewis questioned the necessity of the mechanism, noting that the supplier market is currently stable. "I doubt we are at the domino risk of suppliers going bust in the way they did in the early 20s," he said. "Protecting them over winter by effectively dampening competition … feels raw."

Market Context and History

The MSC was last activated between April 2022 and March 2024. During that period, Russia’s invasion of Ukraine sparked soaring wholesale prices, which caused more than 30 energy companies to go bust. Ofgem noted that while the energy market is stronger than it was during that crisis, volatility remains linked to the conflict in the Middle East.

Households are currently facing the highest energy charges in three years. About 22m homes are paying the equivalent of £1,723 a year for typical gas and electricity usage between October and December, up from £1,663 for the July to September period. Energy consultants at Cornwall Insight forecast that the quarterly energy price cap will climb by the equivalent of a further £149 a year in January, putting the average annual bill at £1,872.

Why it matters

The reintroduction of the market stabilisation charge represents a significant shift in how energy market volatility is managed in Great Britain. While Ofgem argues the measure is necessary to maintain a stable and resilient market and protect consumers from the disruption of supplier failures, critics like Martin Lewis contend it stifles competition and prevents households from benefiting from falling wholesale prices. The outcome of the consultation will determine whether this mechanism is activated for the upcoming winter, potentially affecting the cost of switching energy suppliers for millions of households.

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Sources

• moneysavingexpert.com: Martin Lewis: Ofgem's plan to introduce charges for switching energy tariff 'ain't good for consumers'
• theguardian.com: Ofgem could force energy suppliers to pay rivals if they lure customers with cheaper deals | Ofgem | The Guardian

This article was drafted with AI assistance and checked against the sources above. Company claims are reported as claims. Cover image is AI-generated.