Government energy bill cap could last until 2023

Draft legislation due out this morning will give Ofgem power to extend absolute cap

The government’s proposed cap on energy bills could be in place until the end of 2023 under draft legislation published today.

The Domestic Gas and Electricity (Tariff Cap) Bill, which has been published for consultation, would give Ofgem powers to impose an absolute cap to be applied to households across the UK, apart from Northern Ireland, that are on standard variable tariffs and other default tariffs.

According to a statement from the Department for Business, Energy and Industrial Strategy (BEIS), the cap would be a temporary measure with effect until the end of 2020.

However it could be extended up to the end of 2023 “at the latest” if Ofgem advises that it should. According to this morning’s statement, the cap would be subject to constant review but BEIS would urge Ofgem to impose it “as soon as practicable” after the legislation has passed.

When setting the level of the cap, the energy regulator should have regard to the need to “protect customers, create incentives for suppliers to improve efficiency, enable effective competition for domestic supply contracts, maintain incentives for customers to switch and ensure efficient suppliers are able to finance their activities”.

The government estimates that the cap will affect more than 18 million households which are currently on SVT or other default tariffs.

Peter Earl, head of energy at comparethemarket.com, said the price cap move was a short-term fix. 

“A price cap will not fix the broken energy market,” he said. “At best, it is a short-term solution which could see some households on the worst value tariffs pay a little bit less for their energy.

“At worst, it could simply turn people off ever looking at an energy bill again. Furthermore, it won’t have any impact on energy bills this winter, so consumers need to take action now to prevent being impacted by spiralling energy cost.

Alex Neill, Which? managing director of home products and services, said: “For millions of consumers worried about their energy bills, a cap might sound like a positive move. However, the government must guard against any unintended consequences that undermine customer service and push up prices as a whole. As it will take some time to come into effect, customers sitting on expensive standard variable tariffs should switch now.”

Gillian Guy, chief executive of Citizens Advice, backed the government’s decision to opt for an absolute rather than relative cap, as proposed by backbench MP John Penrose.

She said: “We agree with the government that an absolute cap is a better option than a relative cap, and will help to ensure the market remains competitive so that consumers who shop around can still get a good deal.

“However, a cap on prices isn’t the end of the story when it comes to fixing the broken energy market, which is why it is vital that Ofgem takes into account the need to protect vulnerable consumers, encourage efficiency, and incentivise switching when it sets the cap. This is particularly important given the temporary nature of the measures.

“It’s also crucial that Ofgem monitors the impact of these changes closely, and is ready to take action quickly if it’s not having the intended effect on household bills.”