Although the government has said it will only extend Ofgem’s powers to impose price regulation until 2023 at the latest, suppliers are worried a cap could become permanent, says David Blackman.

This week will see the streets of the UK’s towns and cities taken over by an army of ghosts and ghouls as Halloween entrenches its grip on the imagination of Britain’s school-age population.

But for most energy suppliers today, the only monster worth worrying about is the government’s energy price cap for default tariffs.

Unsurprisingly, price intervention was top of the agenda at Energy UK’s annual conference last week, which took place exactly seven days after the publication of a draft bill to tackle the issue of “abusive” billing for loyal customers.

Ofgem chief executive Dermot Nolan chilled a few spines by opening the conference with an uncompromisingly tough ­keynote presentation.

He warned the industry’s representatives that the price protection was going to be extended “with or without the help of industry”.

“I fully expect industry to co-operate on this in the most positive way ­possible… ­Competition isn’t just about switching. Reforms are overdue: the regulator or ­parliament won’t take no for an answer so you may as well embrace it because change is going to come.”

Unintended consequences

David Bird, chief executive of Co-operative Energy, had an appropriately gory metaphor for the mooted cap, which reminded him of the medieval practice of applying leeches to patients.

The procedure was meant to drain the body of bad blood that was believed to cause illness.

“The evidence suggests that blood-letting kills, not cures,” he said during a panel debate on price caps.

Raising the spectre of “unintended consequences” if the cap is set too low, Bird warned that the government may find itself having to answer for job losses across the sector, as suppliers crunched internal costs and automated or offshored employment.

Michael Lewis, chief executive of Eon UK, agreed: “If the cap is set too tight we will have to look very carefully at what we do and price accordingly.”

He worried that the potential for an indefinite cap could make this pressure more radical. And although the government has pledged that it will only extend Ofgem’s powers to impose price regulation until 2023 at the latest, Lewis warned: “There is a real possibility that the price cap could become permanent.”

In addition to these concerns, the Eon boss reiterated a frustrated conviction expressed at Utility Week’s Congress event earlier this month – that the proposed cap won’t deliver the benefits anticipated by ­politicians to the majority of consumers.

“The fundamental problem is one of engagement, not price,” he insisted. “There are very competitive prices for customers who are willing to engage.”

Right direction

Pointing to recent Ofgem figures showing that levels of switching have risen, with Eon itself having shed one million customers over the past 18 months, Lewis said the industry was moving in the “right direction”.

“I don’t believe the cap will be in the long-term interests of consumers,” he insisted, although he caveated that “vulnerable ­customers are in a different category”.

“We are not going to stand in the way of any extension of the prepayment cap to ­vulnerable customers. If you take vulnerable customers out of the equation, let the market work and competition deliver.”

Despite the heavy hand of ­intervention looming over the energy supply market, Lewis said Eon will press ahead with its plans to migrate customers off standard variable tariffs (SVTs) – the supplier recently announced it will scrap its controversial default tariffs for smart meter customers, replacing them with cheaper fixed-rate default options instead.

“We’re still working hard to implement our strategy to take customers off SVTs. We have embraced the notion that the end of the SVT is inevitable,” he said.

The real answer to helping households with their fuel bills lies in the government’s other big energy policy announcement from the past month, according to Lewis, who welcomed the renewed focus on energy efficiency provided by the publication of the Clean Growth Strategy.

Improving the efficiency of the UK’s housing stock is by far the best way to drive down the nation’s energy bills, insisted the Eon chief executive, backed up by Professor Catherine Waddams, professor of regulation at the University of East Anglia, who worried that the legislative and regulatory time likely to be consumed by the introduction of a price cap could suck the life out of such arguably more important initiatives.

Not so scary

But not everybody in the industry agrees that the tale of the energy price cap is a ­horror story.

Steve Harris, director of trading and energy operations at Ovo Energy, told the same panel debate that his company supports the government’s move to intervene in the market.

He argued that it was “not acceptable” that suppliers should charge SVT ­customers up to double the cost paid by savvier ­consumers for an “essential commodity”.

“I can’t see that the solution to engagement is to continue to inflict pain and ­overcharge these customers.”

As long as the cap was set at the right level, Harris expressed confidence that the industry could cope. “Efficient suppliers could continue to make reasonable returns and make profits,” he stated, while inefficient suppliers will need to urgently review their cost bases. They can no longer rely on “overcharging passive customers to fund an inefficient business”, he said.

But Harris did acknowledge that setting the cap too low could “break” the industry.

As Ofgem begins to consult on the tricky process of breathing life into the government cap, most suppliers will be considering whether the resulting monster warrants a fight, or flight from the market.