The price cap set by regulator Ofgem is likely to cause the collapse of dozens more power suppliers and needs to be reformed to reflect the price companies are paying for energy, according to the head of one of Britain’s biggest energy suppliers.
Keith Anderson, the chief executive of Scottish Power, said the price cap should change at least every quarter rather than every six months “perhaps more frequently depending on the market conditions”.
“And the price cap has to catch up with the reality of the cost, and the supply cost of gas and electricity, more quickly than it currently does,” he added.
He also said the government should introduce a special tariff to protect people in fuel poverty from rising prices.
Ofgem has set the average price cap for households at GBP1,277 from October. As wholesale energy prices have soared around 600% this year, the cost to energy suppliers is substantially higher than the price they can charge.
This has led to a number of small power companies going out of business in the last couple of months, and their customers have been moved to larger suppliers.
“There was a fixation about trying to create more and more competition and get more and more companies into the energy sector,” Anderson said.
“But it went too far. We ended up with a raft of small, not particularly well-run organisations coming into the retail sector. This crisis has shown this is quite a risky business.”
Anderson said the transfer of customers from folded companies is placing a burden on the sector and means that prices will have to rise for the next 12 to 18 months.
“Every customer taken on at the price cap means GBP1,000 of cost,” he said. “We estimate the total cost to the industry of between GBP4bn and GBP5bn.
“The risk is that you will end up going back to the big five or the big six.”
Anderson said Ofgem’s regulations were not fit for purpose.
“The regulator has not kept pace with what has been going on in the marketplace,” he said.
Ofgem responded by saying the price cap had helped protect households from rising gas prices and kept their costs down, but acknowledged the need for change.
“Ofgem, with industry and the government, will need to build an energy market that is more resilient to shocks like this in the future.
“This is likely to mean an approach to regulation which is more focussed on the business models that enter and operate in our energy market, and on the risk they carry,” the regulator said.