Will the price cap fit?

Now this is a test. A real test.” So said the late Graham Taylor in a famously uncompromising documentary showing England’s ill-fated attempt to qualify for the 1994 World Cup as his charges fell 2-0 behind to Norway.

The title of that documentary – An Impossible Job – might overstate the challenge energy suppliers face, but testing times are certainly what confronts many of them right now, with the government’s default tariff cap in force in an already tough environment, featuring wholesale costs which, until recently, have been rising steeply and a highly competitive marketplace.

Indeed, there have already been indications of the unintended consequences some – including ourselves – have previously warned could result from the cap.

Last year saw eight suppliers exit the market altogether – in addition to those acquired by other providers – many of them citing price caps as a contributory factor. While we mustn’t forget the benefits for consumers that competition and the expanded number of suppliers have brought – a number of whom are fast becoming trusted brands with strong financial backing – the spike in failures has forced an overdue look as to whether all those companies entering and operating in the market are fully equipped to be sustainable and customer focused businesses in an increasingly difficult climate.

The supplier of last resort process, while providing continuity and reassurance for customers, is being activated more frequently than its name suggests. The resulting costs of this is adding to the industry’s (and customers’) burden – in the wake of similar concerns over Renewables Obligation payment mutualisation where the shortfall totalled £58.6 million. This is another clear indication of the financial challenges within the sector. It also highlights the moral hazard, with suppliers footing the bill for what they might see as others’ imprudence.

While commentators have been anticipating a narrowing of price differentials as a result of a cap, it’s not possible to identify whether this has happened because prices are rising anyway given that wholesale costs rose by at least 30 per cent over the past year (and nearly 80 per cent of all costs are out of suppliers’ control).

It remains to be seen what 2019 will look like – in particular if switching levels, currently at record levels, are affected by the cap or if the struggles being experienced by some suppliers damage confidence in the market.

It’s been well flagged that the cap will most likely have to rise in April – and despite the fact that this shouldn’t come as a surprise, the reaction to that news is likely to renew the focus on how else to keep bills down for customers over the long term. Yes, supplier efficiency is part of this but so is ensuring our homes and businesses are as energy efficient as possible.

Of course, it’s not the same for every supplier – they each have different business models, efficiency levels, costs (both current and legacy) and customer bases. Incentivising efficiency, as this increasingly competitive market has already done, is a good thing. But the challenge for the cap is how to allocate uniform costs while also recognising, for example, that consumers are not homogenous and the cost to serve differs a lot. It’s got to allow the whole market to be operable, which means not just surviving but being able to continue investing (and attracting investment).

Customers, especially those in vulnerable situations, must be able to get a fair deal but we also need the industry to be able to finance its activities. If it can’t do that, then customers and ultimately the whole market will lose out. Squaring that circle might not be an impossible job, but it’s certainly a test for all concerned – the next year will show how everyone fares.