I received an email from my energy supplier this morning telling me that as ofgem have raised the price cap they are putting my prices up. According to the wiki page “Its primary duty is to protect the interests of consumers, where possible by promoting competition.” Yet the increase seem counter intuitive to this.
In: Economics
The energy conpanies making record profits weren’t the same ones that supplied energy to consumers. Indeed many suppliers went bust in the last few years due to the price cap. Meanwhile the producers that they had to buy from at market rates made record profits.
A problem with regulated markets like energy is that the companies are expected to perform several functions that don’t always coincide.
Socially and politically, energy companies cannot simply abandon customers nor can they simply pass on energy price fluctuations to customers. Because of the Ukraine war, raw costs for energy rose steeply in 2022 but many retail energy companies were restricted from passing those costs to consumers. This resulted severe losses and, in several cases, bankruptcies and forced mergers.
To continue the situation would either force the UK government to nationalize the industry (as companies folded) or give out huge subsidies to keep the companies alive. Essentially OFGEM had to allow prices to increase to avoid an even bigger taxpayer liability.
FYI for those that don’t recognize the term: OFGEM is the Office of Gas and Electricity Markets.
From the context it sounds like they’re a regulatory board.
OP, if that’s true, your answer here is this phrase
>where possible
Most regulatory boards that aren’t simply symbolic and are consumer-focused have a specific process for approving increases in the prices of whatever it is they regulate.
These processes inspect things like cost of the raw products or natural resources that goes into the manufacturing of their regulated result. When the result is something that everyone uses, like energy, this can be VERY complex. It includes both industrial and home-scaled use of all of the means of energy production, not just “gas” and “electricity”. And it’s not just the consumed means to generate that electricity and deliver that gas, it’s all the infrastructure behind it – power plants, transmission towers, dams, storage, on and on.
Something in that big mess of contributors changed enough to make OFGEM say “Hey, the price of production has gone up, and the energy suppliers are paying more for their inbound costs. Our decision making process has identified a need for the cap to increase.”
How much that decision-making process involved analysis of historic profits? No idea. Depends on OFGEM’s assessment criteria and how it applies. But it’s pretty certain that if costs went way up, that’s enough of a driver to increase price caps of the end product too.
It’s important to remember that inflation reduces the value of ALL monetary measures, including “record” profits which often just state a dollar figure rather than a percentage of overall value of the company.
And companies gotta profit if they’re not “not for profit”. It’s simply the way the market works.
Utility companies in the UK buy their supply of energy approximately six months in advance of supplying to the end user. The price cap is set at level appropriate for the time the energy is bought, but won’t be supplied for six months. If three months ago the energy was more expensive for the utility companies to buy, in three months it’s going to be more expensive to deliver to the user. The pride cap reflects this.
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