Penrose calls for ‘emergency circuit breaker’ in price cap

The MP who led the charge for the energy price cap has called for further reform of the mechanism to tackle the so-called loyalty penalty.

John Penrose, delivering the annual Beesley Lecture, hosted by the Institute of Economic Affairs today (7 October), implored Ofgem to ape rules introduced by the Financial Conduct Authority (FCA) earlier this year aimed at ensuring price party between new and existing customers.

Penrose has been a long-term advocate of a relative price cap, which would fix a maximum mark-up between a supplier’s lowest tariff and its default price, as opposed to the absolute cap currently used.

He suggested the regulator could maintain an “emergency circuit breaker” in circumstances such as the recent spikes in wholesale gas prices, allowing it to set an absolute cap if prices moved by a certain amount in a preset timeframe.

In his speech he pointed to evidence that the current price cap has failed to wipe out the loyalty penalty. However, he said it had “succeeded in doing something it wasn’t intended for” in protecting default tariff customers from soaring gas prices.

He said: “We should reform the cap so it stops loyal customers from being ripped off in the 99 months out of a hundred when the market is normal. But make sure it still protects us for the 1 month in a hundred when things aren’t normal, like now, when there’s an international price spike.

“The fix would be pretty simple. The FCA is already introducing new rules to wipe out loyalty penalty ripoffs in insurance, by saying insurance firms can’t charge existing customers more than new ones. We should do the same for energy too.

“But Ofgem should still be able to fix a price cap on the – thankfully pretty rare – moments when there’s an international price spike too. Lots of stock markets have an emergency circuit-breaker, where regulators intervene if prices suddenly rise or fall really fast, and we should have the same for energy. Ofgem would be able to intervene to protect customers with a new price cap when it was really needed, if the international price spiked by more than a preset amount and time.”

Penrose insisted that these reforms would also make energy firms “healthier and more resilient”.

He added: “They’d be able to hedge their risks when international prices spike, because the circuit-breaker would only be triggered if prices moved by more than the pre-set amount. And challenger firms would be financially stronger and healthier because they wouldn’t face unfair competition from big incumbents with lots of long-term clients who were being milked with loyalty penalties to subsidise new customers either.”

Utility Week has launched the Energy Reset campaign, in a bid to ensure the current crisis results in real reform of the energy retail market.