Removing price cap creates ‘fear factor’ for consumers

Removing the price cap would be a “fear factor” for consumers who are scared about their energy bills, an industry expert has warned.

Peter Smith, director of policy and advocacy at charity National Energy Action, was giving his thoughts in response to an exclusive Utility Week poll which found an overwhelming majority of consumers support the price cap remaining after the cost of living crisis has passed.

The survey – conducted for Utility Week by Insight Advantage as part of our Action on Bills campaign – found that almost 84% of respondents were in favour of the cap staying, compared to just over 16% who were not.

Smith’s comments come shortly after Ofgem chief Jonathan Brearley confirmed that the regulator is drawing up alternatives to the cap after admitting it may not be “compatible” with the flexible energy market of the future.

Smith told Utility Week that while the energy regulator has previously looked at a range of options for the cap, the decision to keep it ultimately sits with government and that “it’s hard to see a situation where there’s no wider price protection in place”, especially considering the cap provides transparency around policy costs on bills and the makeup of the standing charge.

He said: “It’s better the devil you know. People are so scared about their energy bills at the moment that any consideration of removing the limited support that it currently provides will be a fear factor. You’ve clearly seen that in the polling results.”

He added: “We would like to see the development of really much stronger and much more targeted price protections for the most vulnerable consumers, that needs to be the priority within Ofgem.

“Any wider reforms to the price cap throw that more targeted support into the shadows and it’s important that there is that really vital focus on how you are going to make sure that the most vulnerable consumers are protected in the retail market. […] People now are more reliant on the price cap than they were when there was government support in place on bills and it’s probably going to be an increasingly popular view that there is a need for keeping some wider cap in place until such time that the situation improves.”

Matthew Cole, head of Fuel Bank Foundation, said he believes the regulator is right to explore options for the future of the cap which he said needed reform.

He told Utility Week: “The price cap wasn’t really designed for the energy crisis. We’ve tinkered with it to make it work but it was really there to give a little more surety to people who maybe didn’t engage in the market for whatever reason, that they were paying a fair price.

“Any concern about excessive profits or excessive margin being made or taken, that was eliminated by the price cap. When the energy crisis came along, we then used the price cap to give additional support to people. So I think the cap has been really useful, but I do think it is the right time to look at it.

“I was encouraged by Jonathan’s words, it wasn’t about ‘we’re dismantling the price cap’ or ‘it’s time for the price cap to be retired’, it was how to reform it and change it. So I think there’s a recognition that you need some degree of protection, but it’s right to make sure the protection is right.”

Cole said that it is important to ensure the cap works at the c.£2,000 level being forecast for the foreseeable future, so long as it doesn’t stifle competition or the ability for consumers to choose other products which might work better for them.

Among the key reforms the charity boss would like to see is on the timing of adjustments to the cap, with the people his charity helps expressing concern that they cannot plan their finances in advance with the cap changing quarterly.

He also called for reforms to the standing charge but warned against proposals from Centrica chief executive Chris O’Shea to remove them completely from the cap.

Cole added: “Wouldn’t it be great if you could get to a point where you have standing charges which don’t disbenefit or benefit anybody in particular but just cover the fixed cost of energy?

“Chris O’Shea at British Gas has been talking about the removal of the standing charge. That’s really dangerous. It’s really great for low consumers but if you assume that the standing charge is there to cover the cost that a company incurs, so it would be billed into the unit rate, a high consumer will end up paying the standing charge twice. […] So I think that standing charge reform is really important and that being built into price cap 2.0 would be amazing.”