CMA to review prepayment price cap

The Competition and Markets Authority (CMA) has decided to review the order it issued imposing a price cap on prepayment tariffs.

The review will consider whether the order should be revoked or altered in light of several changes in circumstances, namely the slower than anticipated rollout of smart meters and the introduction of the market-wide cap on default tariffs at the beginning of 2019.

The order, which came into effect in December 2016, limits the unit rate and standing charge for households on a prepayment meter until the deadline for the completion of the smart meter rollout at the end of 2020. It was one of a number of remedies put in place following the CMA’s two-year investigation into the energy market.

In December the CMA invited stakeholders to give their thoughts on whether a review should be held, and if so, what it should cover. It initially proposed to examine the allowances under the cap for policy costs and indirect costs relating to the Data Communications Company (DCC) – the firm responsible for managing the smart metering data and communications infrastructure.

Among other things, respondents raised concerns that the coexistence of two price caps – calculated in different ways and on the basis of different data – could lead to unintended consequences for consumers and competition, for instance, reduced incentives to obtain a smart meter.

Anna Rossington, deputy director for retail price protection at Ofgem, said the regulator agreed there should be a “broader review of the prepayment meter (PPM) cap”.

She said the review should not only examine policy and DCC costs but instead consider “all cost components of PPM consumers’ bills”.

“It is important to understand the key differences between the PPM cap’s and the default tariff cap’s estimates of each cost component and to align them where appropriate,” she explained.

“We believe the default tariff cap methodology would reflect current market conditions more closely.”

Rossington continued: “A review is especially important as the introduction of the default tariff cap reduces scope for suppliers to recover any potential shortfall in PPM revenues from customers with other payment methods.

“As the CMA is aware, a number of companies have approached us regarding the cost reflectivity of the PPM cap.

“Given the nature of these concerns, the CMA may wish to consider what timeframe would be appropriate to sufficiently understand and address any potential issue.”

A spokesperson for the DCC said: “We continue to support our customers as they roll out smart meters across Britain at an increasing rate.”

Smart Energy GB is in charge of the national campaign to promote the smart meter rollout. The company’s director of corporate affairs, Robert Cheesewright, said: “It’s important that vulnerable customers are protected within the energy market. We look forward to the outcome of the review.”

Former Ofgem boss Stephen Littlechild recently called for the prepayment price cap to be gradually phased out over the next few years.