Level of price cap cause for ‘concern’ for energy companies

Ofgem’s proposal to set the energy price cap at £1,136 per year for a typical dual fuel customer has been described as “concerning” for the whole industry.

Energy companies have responded to yesterday’s (6 September) announcement by Ofgem of the proposed energy price cap, due to come into effect in December.

When it is introduced suppliers will have to cut their prices to at or below the level of the cap.

Npower, which is a step closer to merging with SSE’s retail arm after getting provisional clearance from the Competition and Markets Authority, said the level of the cap is a cause for concern for energy companies.

A spokesperson for Npower said: “The potential level of the price cap is concerning for the whole industry.” The company will study “the detail” to “understand the proposed impact more fully”.

Also responding to the news, SSE’s chief executive Alistair Phillips-Davies, said the proposed cap, associated methodology and input data will require the most “careful scrutiny” in the coming weeks.

He said: “SSE will assess the potential impact on its customers, operations and the wider GB energy market and will respond fully to Ofgem’s consultation. The key question to be answered is whether the proposed cap is cost-reflective, fair and sustainable.

“An absolute price cap is a significant market intervention, requiring a complex set of judgements around the multiple and variable costs involved in supplying energy.

“Setting the cap at a level that protects the needs of current and future standard tariff consumers, preserves effective competition in the market and enables efficient suppliers to finance their licensed activities is a challenging task but also an essential objective, and it is against that objective that the proposed cap and associated methodology needs to be tested.”

Phillips-Davies added: “SSE supports the development of a healthy, well-functioning competitive energy supply market and continues to believe that competition, not caps, best serves the long-term interests of customers. Nevertheless, we will continue to engage fully with Ofgem to ensure that the default tariff cap is as fair and robust as possible.”

EDF also said it will review the proposed methodology “in detail”. The company plans to “work constructively with Ofgem” to identify any adjustments that might be needed to ensure the “cap is set appropriately”.

“The cap needs to reflect all the costs that companies face whilst preserving service and competition,” the company said.

Martin Lewis, founder of Money Saving Expert revealed his reservation that a “fair” tariff is not the same as a “good” tariff.

He said: “Ofgem has been brave, setting the price cap lower than expected. It will mean millions see a noticeable reduction in bills. Yet the regulator was given a poisoned chalice. It is calling this new tariff a ‘fair’ tariff, but that isn’t the same as a good tariff.

“The savings are still pitiful compared to the amount people would get if they switched and went to the market’s cheapest providers – but there is a real concern the imposition of a cap will give people a false sense of security that doing nothing is fine.”

Meanwhile big six provider Eon described Ofgem’s announcement as a “major milestone”.

A spokesperson for the company said: “Before responding fully we are reviewing the detail in terms of what it means specifically for our customers and also the wider UK energy market.”

In the mid-tier sector, Hayden Wood, co-founder of green energy company Bulb, said: “It’s good news the government is taking action and that prices will go down for millions of people. But even after the cap comes into force, energy bills will still be too high.”

An Ovo spokesperson added: “A price cap is the only solution that will protect customers and still allow innovative suppliers to compete. All energy companies should accept the need to reassure customers and restore trust in the energy market.

“The sooner the cap is in place, the sooner the industry can move on and focus on utilising intelligent technology like home batteries and electric vehicles to transform the customer experience and cut emissions.”

The regulator said 11 million households on poor value default tariffs are set to save around £75 on average, while a typical consumer on the most expensive tariffs would save more than £120.