How the government should implement the price cap

"Customer loyalty should be rewarded by energy suppliers, not exploited"

Energy is a special and essential service. For this reason, the operation of energy markets is held to high standards. But, the energy market today is broken and millions of people are penalised for the crime of staying loyal to their energy provider.

In the Business, Energy and Industrial Strategy Committee’s inquiry examining the government’s draft legislation for an energy price cap bill, we found competition in the domestic energy market is not working effectively for 12 million customers stuck on standard variable and default tariffs. The reality is that this market has been dysfunctional for years and that it has become two-tiered, with some consumers facing paying up to £300 more than others each year.

No customer should be penalised disproportionately for not engaging with competition

Customer loyalty should be rewarded by energy suppliers, not exploited. Currently too many energy suppliers rely on a business model where they target cheap acquisition deals at engaged customers who switch, whilst making substantial profits from “sticky” customers on expensive variable tariffs who do not or rarely switch. Regardless of customers’ reasons or obstacles to switching suppliers, no customer should be penalised disproportionately for not engaging with competition, nor should they constantly be required to defend themselves against excessive charges. Where markets fail to deliver fair outcomes, intervention is justified.

When the government published in October 2017 the draft Domestic Gas and Electricity (Tariff Cap) Bill, in which it set out its plan to introduce a temporary absolute price cap on standard variable and default tariffs, we heard predictable wailing from the big six energy companies about the damage this would inflict on the market. If only the big six had taken some of the repeated warnings from the government seriously enough to initiate meaningful measures to stop their customers getting ripped off, then this intervention might have been avoided. But the fact is those retailers who were found by the Competition and Markets Authority to be operating inefficiently and passing excess costs onto standard variable and default tariff customers have brought this intervention upon themselves. The BEIS Committee’s hope is they start treating their loyal customers more fairly in the future.

An energy price cap is now necessary

The BEIS Committee agrees with the government that an absolute price cap – and not a relative price cap –  will be the most effective measure at delivering the Bill’s key goals: improving fairness and reducing the overcharging of standard variable and default tariff customers. Ofgem needs to up its game too. In the past, Ofgem has been too slow and too reluctant to use its powers to step in and protect the interests of customers, especially vulnerable customers. We have called on Ofgem to be much faster and more proactive in using its extensive powers to protect consumers from overcharging in the future.

Once the cap is lifted, this cannot be a green-light for suppliers to return to bad habits. Our report recommends the government and Ofgem should take any necessary measures to ensure that the elimination of overcharging remains in place in the long term and that suppliers are not able to go back to their overcharging and cross-subsidising practices.

An energy price cap is now necessary and a commitment to introducing a cap was in both Conservative and Labour manifestos at the last election. The government must now act urgently to ensure this cap in place to protect customers next winter.