Government must not see price cap as answer to affordability

Ministers must not see the energy price cap as the answer to affordability issues, an industry expert has warned, amid concerns there is currently no billpayer support in place for this winter.

Daniel Portis, deputy director of policy (customers) at Energy UK, was speaking to Utility Week following comments made by Ofgem’s chief executive earlier this week where he suggested the cap may no longer be the most effective form of price regulation.

“The price cap was designed for a market that was much more stable – so, pre-2020 – and it worked quite well,” said Jonathan Brearley, in an interview with The Guardian. “But in this volatile market, the price cap has costs as well as benefits, so we would welcome a debate on the future of pricing regulation.”

Portis said that the Ofgem chief’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.”

Next Friday (25 August) Ofgem will announce the price cap for the period beginning 1 October, 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.

‘Behind the curve’

As part of Utility Week’s Action on Bills campaign, we are calling for the provision of support for customers this winter, ahead of more targeted measures, such as a social tariff, next year.

Portis was asked whether he believes a social tariff will still be implemented, considering Parliament is in recess and no consultation has been issued.

In response, he said: “My take is that, firstly, government is now too far behind the curve to do what it said it was going to do, which is introduce an enduring mechanism for targeted support, AKA a social tariff, by April next year. I think that’s now implausible. And there’s real concern that we’re not going to see a formal consultation on establishing one the other side of recess which would probably be needed to deliver before the next election.

“At a minimum, government should do the work behind the scenes that is required to enable more targeted support to work in practice in future. I think the government is now in a place where it understands that not having a viable mechanism to target support to people who need it, is an Achilles heel, because if we end up with another big price spike, it will end up forced to do universal support again.

“Universal support is unsustainable, nobody in government wants to be in that position. If we don’t get a consultation, there is still scope for government to get on quietly with the work of delivering a mechanism, and largely that work is about the data you need to identify vulnerable customers. They may well do that work in the background so that in the case of another big hike in prices, it is able to deliver targeted support.”

Yet Portis added that this is very different to recognising that current prices are “unaffordable for a significant chunk of the population” and that over the long-term, government policy must ensure that those people have a price that they can afford.

“Given the new normal of higher prices it is vital that government delivers on its committed consultation rather than seeing falling wholesale prices as a signal to exit the market,” he added.

Portis said there are “points of agreement” between suppliers on how a social tariff would work, such as that it should be taxpayer funded and that the government, rather than energy suppliers, should determine who receives the support. He also said it was important that customers who received such support should still be able to engage in services that may appear with the net zero transition.

He further added that the industry is most likely to coalesce around something that looks like a social discount rather than a bespoke social tariff offering.

Standing charges

Utility Week additionally asked Portis for Energy UK’s views on payment levelisation.

Under the Energy Price Guarantee (EPG), the government will temporarily level prepayment meter and direct debit standing charges from 1 July this year to 31 March 2024. However, the Treasury has tasked Ofgem with making proposals for removing the PPM “premium” permanently after the EPG ends.

Portis said the trade body’s preferred option is for the government to continue to have a role in funding the differentials, “particularly where it’s trying to achieve some sort of social outcome”.

He added: “So for instance, when it’s levelising PPM with direct debit, the rationale for that is not that they’ve got the same costs to serve, it’s that there is a social good in ensuring that people on PPM aren’t paying more for their energy because they tend to be less able to afford it. We think the most appropriate way to make that happen in practice is for government to fund the gap, it’s a pretty small gap.

“Ofgem are and have been looking at a range of options for doing it. For example, placing a levy on all customers that goes into a big pot, basically, and that pot is then distributed to suppliers according to how many people they have on different tariff types that have been levelised. It could technically be made to work but there is not quite a consensus view in the market as to whether that’s a sensible way to go.”