Centrica moves to scrap SVTs

British Gas owner’s commitment comes with raft of market reform proposals it hopes could replace government’s energy retail price cap

British Gas will abolish Standard Variable Tariffs (SVTs) for new customers by 31 March next year, making it the third supplier to confirm such a move.

The announcement from Centrica, British Gas’s parent company, was made today (20 November) alongside a raft of measures the company believes could remedy failures in the domestic energy retail market, and which it claims are preferable to the introduction of the wide-ranging price cap proposed by government.

In place of SVTs, Centrica CEO Iain Conn said that from April 2018 British Gas will use a new 12-month fixed rate default tariff for customers who do not select one of a range of other competitive tariffs to move on to.

Conn told journalists at a media briefing about the move that in order to motivate customers to proactively chose the best available tariff for their needs, the new default tariff will be priced in a way which makes it “unattractive but not punitive”.

He declined to confirm however, whether the default product will be cheaper than British Gas’s current SVT, which costs on average £1,072 according to data from the regulator Ofgem.

For existing customers using SVT tariffs, Centrica promised to be proactive in encouraging them to choose more competitive deals, however, the company also urged government and the regulator to outlaw the use of tariffs with no end date, so bringing a market wide end to the use of SVTs.

Around 4.5 million of British Gas’s 8.3 million customers (roughly 60 per cent) are currently on SVTs, with 70 per cent of the company’s profits coming from this segment of its customer base. In October, national press reports suggested increasingly squeezed margins could force British Gas to curtail dividend payments to shareholders.

Asked what they’re doing to ensure Centrica shareholders respond positively to the company’s decision to phase out SVT income, Conn said: “The most important thing is to get the market structure right so it’s good for the customer. That’s what we’re trying to do.”

The chief executive also denied that Centrica has any plans to spin out or sell off its energy retail business, as SSE and Innogy recently announced they would do in response to persistent volatility in the policy frameworks surrounding the market.

“We believe we can have an attractive energy business in the UK,” he said.

The phasing out of SVTs was one of 14 measures proposed by the company to resolve energy market failures – seven of which it will implement itself, and a further seven which it has asked government and the regulator to introduce, “to increase engagement, choice and transparency”.

Conn insisted these measures have not been published in response to the publication of draft legislation for a cap on all domestic energy default tariffs, saying that Centrica has long been vocal in expressing its opposition to the concept price regulation as a remedy for market failures.

In April, Conn wrote to the prime minister and energy secretary Greg Clark to outline his views in this area and the chief executive said that this letter proposed a similar framework for market reform as the measures published today.

In addition to phasing out SVTs, these proposals include a range of commitments and calls for action which will increase engagement and market transparency, and which will promote “fairness”.

Notably however, Centrica’s change agenda for the energy market also includes a call for policy and environmental costs, currently wrapped into domestic energy bills to be split out and handled via general taxation.

Conn described this proposal, which echoes the advice put forward by Professor Dieter Helm in his recent, government-commissioned Cost of Energy Review, “controversial” and a statement from the company admitted that such a change “would not be easy”.

However, Conn insisted the current arrangement for passing on environmental and social policy costs is “regressive”.

He also reiterated a call for social and environmental policy costs to be spread evenly across the energy supply market, saying that current rules which see this burden handled only by larger suppliers has created a “non-level playing field”.

The national smart meter rollout was also tackled in Centrica’s alternative market reform package. The company said the programme needs to become more efficient and flexible, allowing for rapid advances in technology.

At present, Centrica claims it is deploying smart meters at a cost of around £300 per installation, adding around £40 to customers’ bills.

The company suggested that one way of increasing the efficiency of a supplier-led rollout might be to alter the existing “opt-in” nature of the programme.

And as to whether he thought that this new approach to smart metering and the other 13 proposed measures might derail the introduction of the price cap, Conn said: “Even the Competitions and Markets Authority [CMA] has concluded that they [price caps] will probably result in ‘disbenefits’ for customers. So I think there’s got to be the possibility that if they’re presented with some industry-led alternative, that they might actually think that might be worth considering.”