Energy UK response to Energy price cap: technical approach to Market-Wide Half-Hourly Settlement consultation

Executive summary

Energy suppliers have dedicated significant resources to market-wide half-hourly settlement (MHHS) migration and are moving at pace to deliver the long-term benefits for consumers. MHHS presents an opportunity for the market to benefit customers through tailored offers. Through engagement with flexibility offers, customers can help to reduce the costs of the energy system and lower their bills.

We welcome that Ofgem acknowledges that, without reform, the price cap risks stifling tariff innovation, as well as undermining cost recovery and financial resilience at a critical point when MHHS will add to the costs and risks facing suppliers.

Energy UK has several key recommendations as Ofgem develops its approach:

• Ofgem should ensure that the price cap is cost-reflective, supports investment and provides regulatory freedom for the market to innovate.
• Commercial tariff innovation that incentivises and rewards customer flexibility on time-of-use (TOU) fixed contracts outside the price cap is dependent on two key factors:
  • The scale of the engaged customer market. This is shaped by numerous factors including commercial strategies as well as how the price cap operates and is communicated by Government and Ofgem. This is alongside legacy barriers to passing through the value that consumer flexibility actions offer the energy system.
  • Scope for tariff investment is limited by insufficient headroom within the price cap, particularly given the scale of customers on the cap. The role of the price cap under MHHS needs reform and greater headroom is required. This is further explored in our recent report Demand Better: A smarter fairer energy retail market, which calls for Ofgem to publish a multi-year roadmap for the evolution of the price cap.
• Whilst the Clean Flex Roadmap has helped provide clarity on Government ambition for flexibility, there is currently a lack of strategy for harnessing both flexibility and the role of fair or regulated pricing together.  Price restriction interventions might seek to enhance flexible demand and/or provide protections, but they will also reduce supplier control of their pricing strategies, adding costs and reducing the price differentials that drive behaviour change.
• Creating multiple price caps goes beyond the original intended purpose and scope of the cap, increasing cost under-recovery risks for retailers and causing confusion for customers. This is an area where outcomes-based regulation is needed to reflect the tailored tariff solutions that can better reflect customers actual interests and needs.
• Demand profiles should be updated mechanistically and regularly, so that the cap keeps pace with changes in the default tariff cohort. Affordability concerns should be addressed transparently through targeted policy support, rather than by suppressing cost-reflective cap allowances.
• Ofgem should use supplier data from customer migrations under MHHS from January 2027 and should not attempt to define cost allowances using elective settlement data.
• Ofgem should also prioritise a review the gas wholesale allowance approach given the changes in consumption habits.