Editor’s letter: Suppliers fear a cap will be hard to remove

The pledge coughed up by Theresa May at her party conference, to deliver legislation for the introduction of a market-wide cap on default energy tariffs, was far from idle. Just a week after her troubled speech, a draft bill emerged from the Department for Business, Energy and Industrial Strategy setting out the government’s arm’s length approach to the delivery of “justice” in the energy market.

The bill proposes to empower Ofgem to set a cap on all default tariffs (note, not just SVTs) for all suppliers at least until 2020.

The details of the bill may yet change as it passes through parliament – with the scope for activists on both sides of the house to put forward amendments that add rows of teeth to the final legislation.

But for now, worried suppliers eyeing the bill’s likely impact on their businesses will have two main questions: at what level will Ofgem set the cap? And when is it really likely that it might be removed?

The regulator faces a thankless task as it attempts to reconcile the relentless political focus on customer protection with the bill’s reasonable, but arguably contradictory, stipulations that the cap must also allow for competition and investment.

Ofgem plans to consult on its approach later this year, but already, suppliers will be considering just how far they may need to go with cost-efficiency schemes in order to survive with curtailed revenues. Extensive offshoring of back office business activities or automation in call centres will certainly be on the table.

Some may even take another look at how strategically ­important energy retail really is to their wider business goals and either withdraw, or merge with other players to find sustainability in massive scale. With a cap in place, arguments that big mergers are anti-­competitive would certainly be harder to sustain. Industry sources eye unprofitable Npower and EDF Energy as the most likely candidates for any plug-pulling or integration.

Such scenarios might seem drastic, but their probability increases in view of the commonly accepted fact that a cap, once in place, will be extremely difficult to remove.

The government’s draft bill makes provision for extending the cap to 2023 if market reviews do not satisfy Ofgem or BEIS. But it’s difficult to imagine a set of conditions that would persuade any government to take the political risk of removing customer protection in the energy market. The more likely scenario may be that a Labour administration brings forward market reforms that make the cap seem like small-fry disruption. Either way, suppliers may be excused for engaging in a little existential contemplation.