Ofgem could force energy suppliers to pay rivals if they lure customers with cheaper deals

Energy suppliers could be forced to pay a charge to rivals if they lure customers with cheaper deals, as the industry regulator for Great Britain attempts to prevent suppliers going bust this winter.

Ofgem has published a consultation on a proposal to reintroduce the market stabilisation charge (MSC), which aims to prevent suppliers failing if there is customer exodus, as it frets over the impact of sharp swings in energy prices linked to the conflict in the Middle East.

The charge was last activated between April 2022 and March 2024, when Russia’s invasion of Ukraine sparked soaring wholesale prices that caused more than 30 energy companies to go bust.

“We’re preparing for what is likely to be a difficult winter for many households,” said Neil Kenward, the interim director general of markets at Ofgem. “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.

“In volatile market conditions, it’s important that suppliers can continue to secure the energy their customers need without taking unsustainable risks.”

Under the mechanism, the MSC would be triggered if wholesale prices fall more than 10%. At that point, suppliers who win customers by being able to then offer cheap deals would have to compensate rivals 85% of the drop in wholesale rates.

“When wholesale prices fall sharply, suppliers that have bought energy in advance for customers on default tariffs can face losses if large numbers of customers switch to cheaper fixed deals,” Ofgem said.

When Ofgem last activated the MSC in 2022 Martin Lewis, the founder of the consumer advice site MoneySavingExpert, swore at the regulator on a press call and said the mechanism sold consumers “down the river” because it would deter competition. He later posted an apology for his “emotional rant” on the social media platform X.

Reacting to Ofgem’s consultation, Lewis said on Friday that consumers’ will not get as good deals if wholesale prices drop because the mechanism acts as a “switching penalty”.

He added: “The new supplier can’t pass a chunk of the saving from lower wholesale rates on to you, because it has to hand much of it to your old supplier. The cheap fixes and switcher deals offered will be a lot more expensive, in order to protect energy firms’ profits. It ain’t good for consumers.”

He questioned the need to reintroduce the mechanism, pointing out that many energy companies have made significant profits since last time it was triggered.

“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 20s,” he said. “Protecting them over winter by effectively dampening competition … feels raw. I don’t like it.”

Ofgem said that reactivating the MSC would not “automatically create charges or increase customer bills”.

The consultation is seeking views on how the mechanism should operate, including trigger levels, notice periods and deactivation arrangements.

“The MSC supports responsible energy purchasing and helps reduce the risk of instability in the market during periods of significant price volatility,” Kenward said. “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.”

Households are facing the highest energy charges in three years this winter after rising market wholesale prices pushed up the government’s price cap from this month.

About 22m homes are paying the equivalent of £1,723 a year for typical gas and electricity usage between October and December, up from £1,663 for the July to September period.

Ofgem’s quarterly energy price cap is forecast to climb by the equivalent of a further £149 a year in January, according to energy consultants at Cornwall Insight, which would put the average annual bill at £1,872.

The chancellor, John Healey, is planning a major intervention to cut energy bills for poorer households in this month’s budget.