Will the sun set on the energy price cap in 2023?

With Ofgem recently publishing its framework for assessing whether effective competition exists to remove the price cap, industry experts have voiced their concerns about the smart meter rollout being an indicator of success. A legislative “sunset clause” stipulates the cap will end in 2023, but will the sun actually set on the tariff cap?

Since its introduction there have been many voices citing concerns with the default tariff cap.

How the cap is set, how long it will be in place and whether a cap is necessary at all are all concerns that have been aired.

It was brought in as a temporary measure but whichever government is handed the keys to power in the run up to the next general election will have to preside over its removal. A hard sell to an already fluid and unpredictable electorate.

Following Ofgem’s publication of its long-awaited criteria for assessing whether market conditions are sufficient for its removal before the end of 2023, industry voices have given their thoughts on the framework.

Specifically the new framework will assess whether the conditions are in place for “effective competition” in domestic supply contracts.

Three conditions for effective competition were outlined in the report. They are:

• Structural changes
• A well-functioning competitive process
• Fair outcomes for consumers

Alan Whitehead, Labour shadow minister for energy and climate change, worked at committee level on the price cap bill. The committee proposed several amendments which provided details on how Ofgem can assess whether effective competition in the market exists.

Whitehead laments the omission of all but one of the amendments to the bill proposed by the committee, which he argues makes Ofgem’s task even more difficult.

“What Ofgem might think is a resumption of a fair market to some extent may be swayed by what they think they have done in terms of sorting out a fair market – because that’s part of their job.

“Part of our aim of trying to put those amendments in at the time the legislation passed was to get some sort of objective handle on this.

“I think it demonstrates that actually we are in a pretty unsatisfactory position as far as how that procedure is going to work to bring the price cap to an end if that is what is wanted.”

The amendments initially proposed included, among others, one looking at the extent to which there are incentives for supply licencees to improve their efficiency, as well as the extent to which incentives for domestic customers to switch tariffs are in place.

The one amendment which was enshrined by law was the stipulation that a review into effective market competition must consider the extent to which progress has been made in installing domestic smart meters.

The importance of smart meters as an indication of competition is often exagerrated, argues one industry analyst,

Lakis Athanasiou, of Agency Partners LLP, says: “Too much is made that smart meters are a ‘silver bullet’ to make you switch more or make it a competitive market.

“It is unlikely that customer awareness of fuel bills will increase much beyond an initial period following installation. More innovative tariffs, allowed by smart meters, will merely engage those already engaged.”

The smart meter rollout has been anything but an easy ride and the initial deadline for installations has recently been extended to 2024 – four years later than planned and one year after the end of the price cap.

Whitehead meanwhile highlights another important point in that Ofgem has to effectively “mark its own homework”, meaning there is little in the legislation, other than the smart meter clause, to guide it in its decision.

The regulator considers competition to be effective if there are no “significant barriers to consumers being able to access, assess and act on information about the products and services they may want, thereby driving rivalry between firms to win and retain customers”. This leaves Ofgem with a broad scope to assess its own work.

The shadow energy minister pulls no punches in his response to the report.

He says: “When it comes to the excess profits of network companies, Ofgem was asleep at the wheel.

“Its payment framework forces it to try and predict the future, years in advance, which was easily gamed and exploited by some network companies.

“Labour would scrap this senseless system by bringing energy networks back into public ownership to be run democratically, for the public good, and without ripping off bill payers.”

Athanasiou suggests that despite the current end date of 2023, it is “highly probable” that the cap will continue beyond this.

He adds: “To take away the tariff cap, particularly when it is politically sensitive, it’s unlikely to be done. It is highly probable that tariff caps continue beyond 2023.

“Can you ever have politically acceptable high levels of switching in retail markets? My answer is no because this requires differentials between tariffs and it is those differentials that government and most customers find unacceptable.

“Ofgem comments on the issue in its competition framework document but does not properly address it.

“Ofgem seems to believe that high rates of switching is synonymous with competition and leads to customer benefit. And many times it does not.”

The energy regulator has previously announced its intentions to create a “successor” to the cap.

In July Ofgem published its strategic narrative report where it revealed finding the cap’s successor was a key priority.

Ofgem says that by 2023 it needs to have proven itself to be an organisation “capable of delivering major changes to the energy system”. If it fails to do this, we could well see more legislation introduced to extend the cap.

In today’s political climate, nothing is certain and the term “deadline extension” is an all too familiar one. It would be of little surprise if the price cap is around for longer than legislation currently stipulates.