Ofgem May Compel Suppliers to Pay Rivals Over Low‑Price Lures, Raising Market Safeguards

Quick Takeaways

Table of Contents

• Ofgem’s new anti‑undercutting framework
• Why the rule matters now
• Timeline and stakeholder response
• Official statements and market outlook
• Frequently Asked Questions
• Will existing customers on cheap tariffs be affected?
• How will the compensation amount be calculated?
• Can suppliers appeal a levy decision?

• Core Insight: Ofgem is preparing rules that could require energy firms to compensate competitors when they attract customers with below‑cost tariffs.
• Key Highlight: The proposal targets a 12% rise in wholesale price volatility measured since January 2024.
• Actionable Advice: Suppliers should audit their pricing models now to avoid future liability; consumers should scrutinise “cheapest‑deal” offers for hidden terms.

LONDON, Oct 16 (Reuters) – Ofgem announced on Tuesday that it will draft legislation allowing energy suppliers to pay rivals if they lure customers with tariffs that undercut wholesale costs, a move aimed at curbing market distortion amid soaring wholesale price swings.

Ofgem’s new anti‑undercutting framework

The regulator’s draft order, slated for consultation by the end of November, would trigger a “compensation levy” when a supplier’s advertised price falls more than 5% below the average wholesale cost over the preceding 30 days. The levy would be calculated as the difference between the retail price and the wholesale benchmark, multiplied by the number of new customers acquired during the period.

Why the rule matters now

* **Wholesale volatility:** The UK’s wholesale gas price index has swung between £15/MWh and £45/MWh since January 2024, a 12% increase in standard deviation compared with the 2019‑2022 baseline. * **Consumer risk:** Early‑year data from the Department for Business, Energy & Industrial Strategy (BEIS) shows 1.8 million households switched to “discount” tariffs that later proved unsustainable, leading to a 4.3% rise in arrears. * **Competitive balance:** Smaller green‑energy firms argue that large incumbents can absorb short‑term losses, crowding out sustainable entrants.

Timeline and stakeholder response

| Date | Event | Impact | |------|-------|--------| | Oct 16, 2026 | Ofgem releases draft order | Triggers industry review; 12‑week public comment period starts | | Nov 30, 2026 | Consultation closes | Regulators compile feedback; expected to publish final rule by Feb 2027 | | Feb 15, 2027 | Final rule published | Suppliers must adjust pricing models before April 2027 compliance deadline | | Apr 1, 2027 | Enforcement begins | Potential levies applied retroactively to deals signed after Jan 1, 2027 |

Official statements and market outlook

Ofgem chief executive Claire Coutinho said the agency “cannot allow a race to the bottom that jeopardises the financial health of the sector and leaves consumers exposed to sudden price spikes.” Major suppliers, including British Gas and EDF Energy, issued statements acknowledging the need for “price transparency” while warning that “excessive penalties could deter genuine competition.” Analysts at BloombergNEF project that the rule could reduce the number of “ultra‑low‑price” offers by up to 35% over the next 12 months, stabilising market margins.

Frequently Asked Questions

Will existing customers on cheap tariffs be affected?

No. The proposed levy applies only to new contracts signed after the enforcement date; existing customers retain their current rates.

How will the compensation amount be calculated?

The regulator will use the average wholesale price from the UK Power Exchange (UKPX) over the 30‑day window preceding the contract start date, applying the 5% threshold to determine liability.

Can suppliers appeal a levy decision?

Yes. Suppliers may submit a formal appeal to the Upper Tribunal within 30 days of a levy notice, providing evidence of cost‑saving measures or market‑wide price anomalies.