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Energy crisis: What you need to know

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A North Wales gas terminal. The cost of gas imports has been driving up energy prices.

The last 12 months have been unlike anything we’ve seen before. After energy prices fell sharply early in the first COVID-19 lockdown, the reopening of the economy has seen them rising to record-breaking levels. These high prices, combined with increased price volatility, and some well-meant regulation not working as intended, are placing huge pressure on suppliers, and have made it very difficult for households to secure savings by switching suppliers. Here we explain why, and why we’re still offering tariffs to our users.

Listen to Jon Fletcher, MD of Big Clean Switch, talking to BBC Solent’s Lou Hannan about the current energy situation click here and scroll to 07:10

What’s happening to energy prices?

Wholesale energy prices – the prices suppliers pay for the energy they sell to households – have been increasing constantly over the last 12 months, accentuated by extreme volatility recently as a number of shocks have further shaken the markets. This has led to two main outcomes:

  • Volatility: First, it’s made it incredibly difficult for suppliers to price, because in the time it takes to offer a tariff and win a customer on that tariff, the cost of buying the energy may have rocketed. 
  • The price cap: Second, suppliers with large numbers of customers on ‘standard variable’ tariffs have been unable to raise the price of those tariffs above Ofgem’s price cap. The price cap was designed to protect customers on these tariffs from profiteering by energy suppliers, but the wholesale markets have risen at such a pace that the cap has failed to keep up. Price cap-limited tariffs are now the cheapest deals on the market – and in many cases are loss-making for the suppliers concerned.

    We’ve seen four suppliers go under in the last 10 days – partly as a result of these pressures. Certainly the founders of People’s Energy, the only one of the four to be on our panel, laid the blame on recent price rises in their email to customers:

“Energy suppliers are facing a very difficult time at the moment due to record high wholesale energy prices that are making it incredibly challenging to operate.”
Email from People’s Energy co-founders David Pike and Karin Sode to customers notifying them the company had ceased trading

What are the consequences?

Many suppliers have responded by pulling their tariffs from price comparison sites in response to the price volatility. One major price comparison site has suspended comparisons entirely; others have posted warnings about not being able to save customers money before they can get a quote.

What is the risk of suppliers going out of business?

The current high prices, combined with the energy price cap, are putting enormous strain on some suppliers, and commentators have predicted many may go into administration in the coming months. In some cases, where suppliers purchase a lot of their energy through contracts with renewable generators rather than wholesale markets, they may be partly shielded from the current volatility – at least when it comes to electricity pricing.We are in close contact with our panel of suppliers to understand their position.

What happens if my supplier goes out of business?

Ofgem has well-established processes in place to support customers when their supplier goes out of business. These include a commitment to ensure there is no loss of supply, and that credit balances are protected.

In the past, other suppliers would bid to take over the customers of a failed supplier, with Ofgem securing commitments from them over providing a good deal. The challenge Ofgem faces now is that taking on lots of new customers could be loss-making for most suppliers, as they have to hold standard tariffs at the price cap. As a result, the government is looking at ways to help big suppliers to absorb customers from companies that have gone under, possibly by providing them with government-backed loans.

How is Big Clean Switch responding?

While a number of our suppliers have also temporarily withdrawn from the market, others continue to offer tariffs through us. While these are usually now more expensive than the standard variable tariffs customers will drop onto if they do nothing and stay with their current supplier, we have never solely been about saving money. We launched Big Clean Switch to make it easy for home owners to switch away from fossil fuels to tariffs that supported investment in green energy, and the climate crisis makes this more urgent than ever. While we still have suppliers on our panel willing to offer tariffs, we will therefore continue to make these available to our users.

If you would like to get quotes from a wider range of suppliers, you can still find tariff details on the suppliers’ websites. Use our downloadable quote calculator to make sure you’re comparing like for like.

Our view on the current crisis

Smaller suppliers are not to blame

Ofgem has spent much of the last decade trying to increase competition in the marketplace, and the number of suppliers has rocketed as a result. While some of these suppliers – which we have avoided through our vetting processes – have been poorly run, and often failed within a couple of years of launch – the increased competition has led both to better deals for customers and more innovation. The growth of customer service-focused suppliers like Bulb and Octopus has been a good example of this.

Greater competition has also been good for green tariffs. New suppliers have used green electricity to stand out from the crowd, and the vast majority of challenger brands now offer green electricity as standard (though in many cases they do not meet our strict criteria).

Smaller suppliers by their nature have smaller financial reserves, but most still build in contingency to cope with, say, a particularly harsh winter. The current high prices go far beyond anything any supplier could reasonably have been expected to build into their business model, and are compounded by the fact that the price cap is preventing suppliers charging a market rate for the energy they sell to millions of homes.

We urgently need to transition to a greener, more resilient energy system

It’s impossible to look at the current situation without focusing on our reliance on imported fossil fuels and electricity. Recent price increases have been underpinned by a shortage of gas, combined with high carbon prices (an important tool in ending our dependence on polluting fuels) and loss of European electricity imports due to damage to undersea connectors.

The sooner we end our reliance on imports, and build an energy system that generates, stores and distributes clean green energy within our borders, the sooner we’ll end our exposure to market shocks like this.

While there is inevitably a cost to this transition, it is likely to be lower than many expect, and regardless, the events of the last year, and of the last week in particular, demonstrate that the costs of inaction are far greater.

It’s time for an honest conversation about energy prices

One thing looks certain when it comes to energy: we must expect to pay more. Even if we were to abandon our efforts to limit climate change (which would be totally catastrophic), a multitude of factors point towards continued volatility and price rises: global competition for fossil fuels; a growing tendency towards protectionism; more expensive extraction; and a reliance on large-scale infrastructure with huge costs if it fails are just a few.

The sooner we invest in a greener, more resilient energy system, the sooner we can start to control costs, but we have to face facts: in the medium term, whatever we do, energy is going to cost more.

The key question is therefore how we make sure that those who can’t afford to pay are protected, and can still heat and light their homes. Tools like the price cap are a poor solution – a response to a failure to engage with the market, rather than financial need. Prepayment tariffs, too, need a complete overhaul – they currently place a premium on energy costs for those who can least afford to pay.

This crisis should provide an opportunity to rethink our whole energy system from the bottom up. We cannot simply hide behind the price cap, blame smaller suppliers while propping up the larger ones, and hope the problem goes away.

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