The car crash that has followed a massive hike in gas wholesale policy has left most small energy companies at risk of collapse. The Government is now thrashing around for a solution, but realistically the only option is to subsidise the companies or more likely try and provide a safety net for consumers using public money.
Why was this almost certain to happen at some point?
Government policy has been based on competition in the market and has ignored the risk of rapid wholesale price rises. There has been the assumption that Government can control wholesale prices which was possible when the UK produced gas to meet all its needs. The depletion of gas fields means 60% is now imported. So why was a cap on prices that ignores wholesale costs introduced?
Ed Miliband (remember him?) without any real discussion or research came up with a rather stupid policy of capping energy prices. Quite rightly at the time it was laughed at, because it is economically illiterate, but unsurprisingly was really popular with voters, so with equally little thought, was adopted as Conservative and therefore Government policy.
So, what makes it such a bad idea?
The simple answer is that the energy markets can be incredibly volatile, and therefore setting a rate twice a year, based on a guess at what future prices will be is inherently risky. The problem is compounded as rates will be set as low as possible to protect consumers, but this moves risk firmly onto the retailers. Retailers, to win customers have offered rates that make razor-thin margins and are now looked into rates that are loss making.
What will happen next?
The likely scenario, is that following a bloodbath of retailer failures, a number of large companies will survive but the cap will need to be raised to allow retailers to recoup losses. It should be noted that some of the large retailers will also leave the market.
The cap needs to be abandoned but the Government needs to face the real issue which is use not cost.
Finding the silver lining…
Higher gas prices will drive energy reduction strategies which will also boost actions towards Net Zero.
Luckily you can find out some great energy saving learnings at EMEX London , hope to see you there!
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