Eon warns it is ‘critical’ to get energy price cap right

The chief executive of Eon UK, Michael Lewis, has made no secret of being opposed to the price cap “since the beginning” but has urged it is “critical” we get it right as “parliament has spoken”.

Lewis has proposed key suggestions to avoid “risk confusing customers and harming low-carbon investment”.

Speaking at Utility Week Congress in Birmingham on Tuesday (9 October) Lewis said the company has concerns that market intervention “brings the danger” of reducing customer engagement and could “ultimately be counterproductive” to driving forward the new energy agenda for customers.

“There are some important things that Ofgem needs to do in their consultations to make sure that the price cap is workable and it doesn’t have the negative effects we have talked about.”

The three important factors he cited were wholesale costs, operational costs and headroom.

Lewis expressed concerns that the revised February to July observation period, which is used to set the price cap, misses the wholesale price increases of August and September. This, he said, may result in consumer prices increasing over a very short period.

“That is going to have a very negative impact on the customer experience”, he said.

“It is really important we don’t get a short-term reduction which is reversed very quickly, creating a negative impression.”

The second point made was about operating costs and efficiency.

“Not all energy companies have the same customer base, there are different costs to serve depending on which customers they have. If you have a higher cost to serve customer mix it may seem increasingly difficult to hit the bench mark that Ofgem has put into the price cap operating costs.

“Ofgem itself has recognised that reaching the level of efficiency assumed in the cap will not be possible for some suppliers. In our view that is not in line with what parliament passed in their bill.”

The final area is headroom, an amount above the efficient level of costs in order to facilitate competition. Lewis said the proposals Ofgem made set the headroom at about one third of the level proposed by the Competition and Markets Authority (CMA).

Lewis urges Ofgem to take another look at the headroom to ensure it is sufficient.

“Above all we need to get the price cap working in the interests of consumers.”

Speaking in a later session, Dermot Nolan, chief executive of Ofgem, responding to the possibility of price increases over a short period, said the regulator would be “as transparent” as it possibly could but added customers would know somebody was “watching their back”.

Eon has further called on chancellor Philip Hammond to work with the industry in the forthcoming budget to “make sure a decentralised future energy system can deliver power, heat, mobility and comfort at an affordable price for customers”.

This, it argues, can be achieved by:

• Making energy efficiency a national infrastructure priority and use the budget on 29 October to take early action
• Providing homeowners with a Stamp Duty rebate if they invest in improving the energy performance of their home to at least EPC level C within two years of moving in
• Building on Minimum Energy Efficiency Performance Standards introduced earlier this year for landlords and tighten standards progressively so they must meet an EPC D standard by 2025 and EPC C by 2030
• Help homeowners and landlords afford such investments, pushing Green Mortgages so all banks offer this product to their borrowers

Speaking after the event, Lewis said: “As an industry, we can make real progress when we and the government work as one and with a real determination to succeed. So, my ask of this government is to put policies in place that turn our great ambition into action.”