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

The market stabilisation charge, or MSC, is a payment mechanism Ofgem wants to reintroduce in Great Britain. It is designed to protect suppliers that have bought energy in advance when wholesale prices suddenly fall. Without protection, a rapid customer exodus could leave those suppliers with expensive energy and too few customers to pay for it.

The charge would activate after wholesale prices fall by more than 10%. Suppliers winning customers with cheaper deals could then have to compensate former suppliers for 85% of the wholesale price drop. This is meant to reduce losses for suppliers holding energy bought earlier for default-tariff customers.

Ofgem says the MSC supports responsible purchasing and market stability. Critics, including Martin Lewis, say it could weaken competition and make switching deals more expensive. The consultation is considering trigger levels, notice periods and how the charge would be deactivated.

The proposed MSC would be triggered when wholesale energy prices fall by more than 10%. That threshold is intended to identify a sharp enough market move to threaten suppliers that bought energy before prices dropped.

Once triggered, a supplier attracting customers with cheaper deals could owe the former supplier 85% of the wholesale rate reduction. For example, if wholesale prices fell sharply, the new supplier would not keep the full benefit when taking customers away. Much of the saving would be transferred to the rival that had purchased energy earlier.

Ofgem is consulting on the exact design. Possible changes include the trigger level, how much notice suppliers receive, and when the mechanism should stop. The proposal does not automatically create charges or raise customer bills, Ofgem says, because activation would depend on market conditions.

Suppliers often buy energy in advance for customers on default tariffs. That purchasing decision is based on serving a particular number of customers at expected prices. If wholesale prices later fall sharply, cheaper fixed deals can become attractive and many customers may switch.

The original supplier may then still hold energy bought at higher prices, but have fewer customers using it. Its costs do not fall as quickly as its customer numbers. Meanwhile, the new supplier can offer a cheaper deal because it is buying energy at the lower wholesale price. The old supplier can therefore face losses.

Ofgem says the MSC would make the new supplier compensate its rival in this situation. The proposed payment would cover 85% of the wholesale fall after a decline above 10%. Ofgem argues this reduces instability, while Martin Lewis says it could dampen competition.

Ofgem last activated the market stabilisation charge between April 2022 and March 2024. The mechanism was used during an energy crisis marked by soaring wholesale prices after Russia’s invasion of Ukraine. That period showed how quickly market movements could threaten suppliers.

More than 30 energy companies went bust during the crisis. Ofgem now points to that history when arguing that suppliers need protection from sharp price swings and sudden customer movement. The charge is intended to reduce the risk that suppliers fail after purchasing energy in advance.

The market is stronger than it was during the crisis, according to Ofgem’s interim markets director general, Neil Kenward. However, Ofgem says volatility remains, particularly as it prepares for a difficult winter. The regulator is consulting before deciding how the mechanism should operate if reintroduced.

Reintroducing the MSC could reduce the savings available when customers switch suppliers after wholesale prices fall. A new supplier would have to pass 85% of the wholesale drop to the previous supplier when the trigger applies. That cost could influence the price of its fixed deals and switcher offers.

Martin Lewis says suppliers would be less able to pass lower wholesale costs to customers. He argues that cheap fixes could become more expensive because suppliers would need to hand much of the saving to rivals. Ofgem’s position is different: it says the mechanism protects consumers from instability and does not automatically raise bills.

The effect on competition is disputed. The charge could support suppliers and reduce the risk of failures, but it might also weaken the incentive to offer aggressive switching deals. The consultation will examine the rules before any reactivation.

The current price cap affects about 22 million homes in Great Britain. For typical gas and electricity use, households are paying the equivalent of £1,723 a year between October and December. That is higher than the equivalent £1,663 annual cost for the July-to-September period.

The increase follows rising wholesale market prices, which pushed the government’s price cap higher from October. The cap sets the charges suppliers can apply, so changes in the costs they face feed into what households pay. It is presented as an annual equivalent, even though bills vary with actual use.

Energy consultants at Cornwall Insight forecast a further £149 a year increase in January. That would put the average annual bill at £1,872. The chancellor, John Healey, is planning a major intervention for poorer households in this month’s budget.

Wholesale energy prices are the market prices suppliers pay when purchasing energy before delivering it to homes. They can move sharply because of wider events and market conditions. The article links recent volatility to the conflict in the Middle East and earlier soaring prices to Russia’s invasion of Ukraine.

When wholesale prices fall, suppliers can buy energy more cheaply and may offer lower fixed deals. When prices rise, suppliers face higher purchasing costs. Ofgem’s price cap then allows those costs to feed through into the maximum charges suppliers can apply to households. The cap is reviewed quarterly, according to the article.

That process is visible this winter. Rising wholesale prices pushed the cap higher, taking typical annual costs from £1,663 for July-to-September to £1,723 for October-to-December. Cornwall Insight forecasts another £149 increase in January, reaching £1,872. The article does not provide a fuller technical definition of wholesale markets.