Market Stabilisation Charge licence condition

## What this is about

Ofgem is consulting on reinserting a Market Stabilisation Charge licence condition into domestic supplier licences for both electricity and gas. The condition would sit dormant — it does not activate the MSC, it simply puts the legal wiring in place so that Ofgem could activate it quickly through a future consultation if wholesale prices fall sharply.

The MSC was first introduced during the 2022-23 gas crisis. When wholesale prices spiked and then dropped, suppliers who had forward-purchased energy at high prices faced losses when customers switched to rivals offering cheaper tariffs based on lower spot prices. The MSC required any supplier gaining a customer to compensate the losing supplier for a portion of those stranded hedging costs. It was a per-customer charge, paid by the gaining supplier to the losing supplier, calibrated to the gap between the price at which energy was purchased and the prevailing wholesale price.

The licence condition was subsequently removed. Ofgem now wants it back — not because activation is imminent, but because reinserting a licence condition requires a statutory consultation, which takes time. If prices fall sharply and Ofgem decides the MSC is needed, it does not want to be consulting on the licence condition at the same time as consulting on the charge parameters. This is about regulatory preparedness: putting the gun on the table so it can be fired at pace.

The practical effect is that a switching deterrent becomes a permanent feature of the supplier licence framework, available for activation at the regulator's discretion. The question is whether that optionality is worth the signal it sends about how Ofgem views competition in retail energy markets.

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## Options on the table

Reintroduce the dormant MSC licence condition

Ofgem proposes inserting a Market Stabilisation Charge condition into Standard Licence Conditions for both electricity and gas domestic supply. The condition would impose no obligations while dormant. If activated through a future decision, it would require any supplier gaining a default tariff customer to pay the losing supplier a charge reflecting the losing supplier's stranded energy purchase costs.

The mechanism works as follows. Suppliers hedge — they buy energy forward to cover expected customer demand. If wholesale prices fall sharply, that hedged energy is worth less than they paid. When a customer switches to a cheaper supplier, the losing supplier is left holding energy bought at a higher price with no customer to serve. The MSC compensates for that loss, transferring the hedging risk from the losing supplier to the gaining supplier (and ultimately to the gaining supplier's customers or its own margins).

Who wins: Incumbent suppliers with large hedging books. The MSC protects them from the downside of forward purchasing when prices fall. It reduces the competitive penalty for being on the wrong side of a price move.

Who loses: Challenger suppliers and consumers. Challengers either absorb the MSC cost (reducing their margin on each acquired customer) or pass it through (reducing the price advantage that motivated the switch). In either case, the competitive pressure that a price fall should create — the moment when switching delivers the most value to consumers — is suppressed. Consumers pay either through a direct cost uplift or through reduced switching, which means they stay on higher tariffs longer than they would in an open market.

The deeper problem is structural. The MSC socialises hedging risk. Hedging is a commercial decision. A supplier that over-hedges at the top of the market has made a bad trade. In any other market, that loss sits with the firm that made the decision. The MSC shifts it to competitors and consumers. This is the regulator picking sides in a commercial risk allocation — and picking the side of the firms that got it wrong.

Ofgem frames this as "market stability." But stability for whom? The firms that would otherwise face losses, or the consumers who would otherwise benefit from lower prices? When prices fall, switching should accelerate. That is the market working. The MSC is designed to stop it working at precisely that moment.

There is a real options problem here too (Principle 7 in the analytical framework). A dormant licence condition that can be activated at the regulator's discretion is a free option for Ofgem — it costs nothing to hold and can be exercised when convenient. But from the market's perspective, the existence of the option changes behaviour. Challenger suppliers must factor in the possibility that the MSC could be activated at any time, which changes their hedging strategy, their pricing, and their appetite for customer acquisition. The option is not free for the market even when dormant.

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## Questions being asked

Licence condition design

- Do you agree with Ofgem's proposal to reintroduce the MSC licence condition? [The central question: should the legal mechanism exist at all, even if dormant?]

- Do you have views on the design of the dormant licence condition? [This is asking about the drafting of the condition itself — scope, triggering language, whether it should cover both electricity and gas, and whether the dormant condition should constrain what activation looks like.]

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## How to respond

Deadline: 15 May 2026

Method: Email responses to priceprotectionpolicy@ofgem.gov.uk

Documents: The full consultation document (PDF, 203KB), electricity statutory consultation notice (PDF, 225KB), and gas statutory consultation notice (PDF, 276KB) are available on the Ofgem consultation page.

Who should respond: Ofgem specifically invites responses from domestic suppliers, consumer groups and charities, and third-party intermediaries. But the consultation is open to all interested stakeholders.