Britain's energy watchdog has launched a consultation on plans to reintroduce a measure to help protect suppliers from big swings in gas and electricity prices as the Iran war continues to impact wholesale markets.
How the charge works
Ofgem said it was looking at activating its market stabilisation charge, which is designed to help prevent energy suppliers from collapsing when wholesale energy prices fall back sharply amid volatile markets.
Suppliers can be left vulnerable when they have bought energy in advance at a high price and could then suffer financial losses if prices later tumble sharply and high numbers of customers switch to other firms in search of cheaper deals.
It works by ensuring the supplier which gains a customer through switching pays a charge to partially compensate the provider that lost the customer.
Previous use and current impact
The measure was previously put in place in April 2022 through to March 2024 following Russia's invasion of Ukraine, which sent energy markets reeling.
Ofgem said reactivating it would not automatically create charges or push up customer bills, stressing that payments between suppliers would only be made if wholesale prices fell sharply enough.
But Martin Lewis, founder of MoneySavingExpert.com, warned it was a “form of switching penalty”.
He said: “In a nutshell, it means if wholesale energy prices drop sharply, the cheap fixes and switchers’ deals offered will be a lot more expensive, in order to protect energy firms’ profits.
“That’s because any firm taking on a new customer, including on a cheap fix or other specialist tariff, will have to pay compensation to that customer’s old supplier, if they switch. It’s basically a form of switching penalty.”
Household impact and reactions
Households have already been hit with a 4% hike to Ofgem’s energy price cap from October 1, with forecasters warning power bills could soar by almost another £300 from January.
Neil Kenward, interim director general of markets, said: “We’re preparing for what is likely to be a difficult winter for many households.
“While the energy market is stronger than it was during the energy crisis, volatility remains and the market stabilisation charge helps to protect consumers from that volatility.”
He added: “In volatile market conditions, it’s important that suppliers can continue to secure the energy their customers need without taking unsustainable risks.
“By acting now, we can help maintain a stable and resilient energy market and protect consumers from the costs and disruption that can arise when markets become unstable.”
But Mr Lewis said: “This is a ‘market stabilisation charge’ but the supplier market is pretty stable, and I doubt we are at the domino risk of suppliers going bust in the way they did in the early 2020s.
“A good few energy firms have made large profits since then, and protecting them over winter by effectively dampening competition because it’s ‘not their fault’ feels raw.”
