During 2021 gas and power wholesale prices in the UK rose significantly, driven by lower gas storage levels following a cold winter, delays to the Nord Stream II gas pipeline certification, high gas demand in Asia and an unplanned interconnector outage between UK-France. In 2021, EDF Energy was appointed as SoLR for several failed suppliers (Green Network Energy, Utility Point and Zog Energy) and during 2022 has successfully completed its industry mutualization levy claim, with the highest initial claim acceptance rate of any energy supplier (>90% claimed costs initially approved by Ofgem).
Throughout 2022 energy prices remained high for Winter 2022, due to restricted Russian gas supplies into Europe, low Nuclear generation availability in France and lost LNG cargoes as a result of several processing plant outages. The Government has therefore had to bring in a number of support schemes for domestic and non- domestic consumers to address the affordability challenges presented by such sustained high prices. These support schemes have shielded customers from some of the impact of the ongoing Energy Crisis.
However, EDF Energy still faces significant risk to its hedging strategy due to uncertainties around customer demand responses to the cost of living crisis, and the speed with which the market for Fixed contracts re-opens. There is also volatility risk due to an unseasonably warm start to the Winter and the significantly lower Government support levels for business customers after 31 March 2023. Furthermore, there is additional risk of bad debt due to customer affordability issues and increasing business customer insolvency risk whilst energy costs remain high.
EDF Energy is engaged very actively with the Regulator, UK Government and other stakeholders in the discussions on the market regulations reform and how to support customers through 2023 and beyond on the journey to Net Zero.
Regulatory Change
Ofgem introduced a cap on default tariffs for residential customers on 1 January 2019. On 3 February 2022, Ofgem announced a 54% increase to the Default Tariff Cap, applicable from April 2022 for the following six months. Ofgem later announced that the level of the Price Cap for 1 October 2022 to 31 December 2022 would be £3,549 for the average direct debit customer – an increase of 80% on the previous period, and that the Default Tariff Cap would be updated on a quarterly basis going forwards, rather than every six months.
However some supplier costs were not recoverable through the Standard Variable Tariff (SVT) calculation; in particular, it did not fully allow for the full recovery of energy costs relating to customers switching to SVT in Winter 2021.
To support British households, the Government introduced the Energy Bill Support Scheme (EBSS) under which it is providing a £400 non-repayable rebate to eligible households to help with their energy bills over the 6 months from October 2022 to March 2023.
On 8 September 2022, in addition to the EBSS, the British government announced the Energy Price Guarantee (EPG), to take effect from 1 October 2022, to limit the amount an energy supplier can charge per unit of energy used so that a typical dual- fuel household would pay up to circa £2,500 per year. Households are expected to save around £900 over the winter period from 1 October 2022 to 31 March 2023. Subsequently, on 15 March 2023, the British government announced the extension of the EPG, at the same level, until the end of June 2023. Energy suppliers are fully compensated by the government for the savings provided to their customers under the EPG.
In April 2022 Ofgem introduced a market stabilization charge (MSC) and a ban on acquisition-only tariffs until the end of March 2023. Following consultation, in February 2023 Ofgem announced that these measures will be extended to March 2024.
The MSC is a requirement on all domestic suppliers acquiring a domestic customer to pay a charge to the losing supplier when wholesale prices fall below the relevant wholesale price cap index. The mechanism is intended to help reduce the risk of costly supplier failures and attempts to provide protection to those firms who hedge energy in advance for their customers so that they are not penalised should wholesale energy prices fall sharply. The MSC was triggered for the first time in November 2022.
Ofgem also took steps to strengthen its milestone assessment framework for new and growing market entrants and increased the time period for assessment of new supply license applications.
ECO3 ended on the 31 March 2022. It was replaced in summer 2022 with the fourth iteration of the ECO scheme called ECO4. which will cover a four-year period until 31 of March 2026. Like ECO3, the ECO4 scheme places an obligation on larger suppliers to promote energy efficiency measures that help low income and vulnerable customers achieve notional bill savings.
Alongside this, there is an ongoing consultation between Ofgem and large energy suppliers to introduce a parallel scheme called ECO+, due to launch in April 2023 and run until 31 March 2026. The ECO+ scheme is designed to widen the eligibility criteria for households to be able benefit from energy efficient measures with the help from government grants when they do not meet the qualifying criteria to be able to benefit from the ECO4 scheme.
The government also confirmed this year that the Warm Home Discount (WHD) scheme would be extended for a further four years until winter 2025/2026. The level of support given to qualifying households under the scheme has been increased to £150 for eligible customers from winter 2022/2023.
In July 2022, Ofgem completed its Faster Switching regulatory project to make switching suppliers faster, easier and more cost-effective for customers. Since 18 July 2022, customers now have the option of switching during or after their 14- day cooling-off and once decided, the total switching process from the old supplier to the new supplier should take place within five working days, whereas previously it could take up to 21 working days.
GB energy suppliers were required to take “all reasonable steps” (ARS) to install smart meters for their residential and small business customers before the end of December 2021.
Since January 2022, there has been a new obligation on all suppliers to continue installing smart meters for the period until the end of December 2025. For this period suppliers will need to achieve annual minimum installation targets. The government has consulted on the annual minimum installation targets all suppliers will have to meet for the first two years: 2022 and 2023. These targets are challenging and there are real risks that suppliers will fail to achieve them, given that smart meters remain optional for customers. EDF Energy and other suppliers are working with government to develop future targets which strike the balance of completing smart meter roll out in a way that maintains pace, the correct technical standards and a positive customer experience.
EDF Energy remains committed to delivering smart meters to all residential and small business customers who want to benefit from this new technology. In 2022, EDF Energy has installed a further 563k smart meters and at the end of 2022, 54% of EDF Energy customers in scope for the rollout have smart meters. This meant that EDF Energy has installed a total of 2.9 million smart meters to date, despite several serious challenges, including a Covid-19 related pause of all smart meter installation activity.
In 2022, the non-residential segment supplied a total of 32.43TWh of electricity, of which 2.13TWh was supplied to 241k small business customers (“SME”) and 30.29TWh to 11.8k medium and 5.2k large business customers (“I&C”). The business customer electricity market in the UK is 157.9TWh in total, making EDF Energy the largest supplier to business customers by volume.
The industry has recovered from the Covid-19 demand reduction seen in 2020. Whilst the UK non-residential electricity segment has seen an increase of 0.3TWh in the 6 months from 30 April 2021, a volume increase of 1.7TWh YoY was seen for EDF Energy non-residential electricity segment in 2022.
In SME, managing the risks which have arisen from the pandemic has been the primary focus for much of 2020 and 2021. Steps were taken to price-in additional risk, increase credit restrictions and limit winning higher risk sectors in order to protect EDF Energy’s position. Despite this, SME has developed its channels as customer numbers grew 9% in electricity this year.
