Energy price cap is here to stay

Ahead of Ofgem’s latest price cap announcement, industry insiders tell Utility Week why they believe the cap is here to stay despite growing concerns about its impact on suppliers. While it may not be popular, ministers will be wary about removing a major price protection amid a cost of living crisis. Yet, as industry experts point out, there are other options at the government’s disposal.

The energy price cap is unlikely to be scrapped by government, despite widespread recognition it is no longer fit for purpose, industry experts have suggested.

In recent weeks the cap has come under fire from suppliers and even Ofgem’s chief executive who has suggested it may no longer be the most effective form of price regulation.

Both chief executives of Ovo and Good Energy have welcomed Joanathan Brearley’s comments, which called for a debate on the issue.

Speaking to Utility Week recently Daniel Portis, deputy director of policy (customers) at Energy UK, said Brearley’s comments were “quite unusual for the regulator” and suggested that the need to review the approach to the price cap would receive broad support from suppliers for a number of reasons.

“The first is that Ofgem wants to see the market returning to price competition and the price cap is a significant part of why we’re not seeing more price competition,” he said.

He added: “The other is that the government has thus far stepped back considerably from supporting customers. There’s no real billpayer support on the table at the moment going into what will be a very difficult winter. We were expecting the social tariff consultation before recess, it didn’t come. The mood music sounds like government lost a bit of interest in that. It is really important that the price cap is not seen as the answer to affordability.”

Despite misgivings over the cap, industry experts have said they believe that political sensitivity amid the backdrop of the cost of living crisis mean it is here to stay.

Adam Bell, the government’s former head of energy strategy and current director of policy at consultancy Stonehaven, said the cap had contributed to supplier failures and had additionally constrained the ability of retailers to vary their business model and offerings.

Yet, he added, removing it now would send an “appalling” signal politically. Instead he suggested the government switch to a relative cap, where the capped tariff can only vary by a certain fraction between a supplier’s highest and lowest tariffs.

He told Utility Week: “There are really good policy reasons, technical reasons, for getting rid of the cap but the political reasons against it are overwhelmingly strong.

“So I think if anything happens in this space, and Ofgem has indicated that it might want to, it might involve reopening this question back from 2016 when the cap was first being mooted, around whether it’s an absolute cap or a relative cap.

“That might be the game in town, that’s certainly where I would go if I was government.”

Sharing a similar view is Bill Bullen, chief executive of prepayment meter (PPM) specialist supplier Utiltia, who said: “Our view at Utilita is that politically it seems highly unlikely that they are going to get rid of the price cap any time soon, which is unfortunate because it is failing in a lot of ways.

“Arguably it’s the main reason why 30-odd companies went bust because they couldn’t pass through costs.”

Bullen is highly critical of the way Ofgem has handled the cap since its implementation in 2019 and specifically what he claims is a lack of recognition of headroom allowances.

He suggested that rather than removing the cap altogether, the government and regulator should stick with just the one cap for all payment types as opposed to the three price caps of varying amounts depending on how a customer chooses to pay.

Currently there is the direct debit cap, which is set at £2,074, PPM (£2,077) and standard credit, where customers pay on receipt of a bill by cash or cheque, which is more expensive at £2,211 due to these customers’ higher costs to serve.

Bullen said: “The only solution that we can see that starts to get you out of this straightjacket of price capping is that we just have one price cap and set it at the level of the most expensive customer base, basically those who want to get a bill every quarter and pay. If you’re happy to see potentially vulnerable customers pay at that price cap…then it should be a price cap that you’re happy to see right across the market.

“What would happen of course is that you will actually start to then get competition beneath that price cap for products that are basically more efficient, so either prepay or direct debit customers where cost to supply is considerably lower…so that’s the proposal that we have put to Ofgem on a number of occasions.”

Responding to the comments, a spokesperson for the Department for Energy Security and Net Zero said: “The government will always ensure the energy market is working for consumers to protect them from sky high bills and that households are getting the best deal.

“Our consultation on how best to ensure people can access the full benefits of moving to a smarter, more flexible energy system is ongoing.”

Ofgem will announce the price cap for the period beginning 1 October on Friday (25 August), revising down its definition of an average household’s Typical Domestic Consumption Values (TDCVs) by around 7% per year for electricity and 4% per year for gas.

According to the latest predictions from Cornwall Insight, the cap is expected to be £1,823 for a typical dual-fuel household on the new lower TDCVs, compared to the £1,925 it forecasts using the current TDCVs.