Government proposes to cap energy prices for millions

Draft legislation to introduce energy price caps for millions of households was published by the government on 12 October, the same day that it launched its Clean Growth Strategy. The Department for Business, Energy and Industrial Strategy (BEIS) outlined measures that would limit the cost of standard variable tariffs (SVTs) and other default tariffs that customers are moved onto at the end of a fixed-term deal.

Around two-thirds of energy consumers in Great Britain are currently on this type of tariff, says BEIS, around 18mn customer accounts, four million of which are on pre-payment meters and are already protected by a price cap. Energy regulator Ofgem had announced the previous day that this protection is to be extended to a further one million vulnerable households this winter.

While the government welcomed this latest move by the regulator, it added that no-one should be overcharged by their energy company.

The government is to ask the Commons’ Business, Energy and Industrial Strategy Select Committee to scrutinise the Draft Domestic Gas and Electricity (Tariff Cap) Bill. The proposed legislation would mean a cap would run until 2020, at which point Ofgem would recommend to government whether it should be extended on an annual basis up to 2023.

The Prime Minister said: ‘I have been clear that our broken energy market has to change – it has to offer fairer prices for millions of loyal customers who have been paying hundreds of pounds too much.’

Business and Energy Secretary Greg Clark said: ‘We have published draft legislation today, sending a clear message to the industry that we will protect the interests of their customers if they do not act now to tackle the detriment found by the Competition and Markets Authority.’ The Competition and Markets Authority review of the retail energy market found last year that customers of the ‘big six’ suppliers on SVTs and other default tariffs are paying £1.4bn per year too much.

However, many commentators feel that a price cap is not a good approach to improving the working of the retail energy market. Professor David Elmes, Head of the Warwick Business School Global Energy Research Network, said: ‘The worry is this is the end of efforts to encourage people to be active switchers and consumers of energy. Markets have failed.’

Elmes added: ‘The challenge to energy companies is that their standard variable tariff is more expensive than the best deals on offer, even from the same company. But if customers don’t bother to switch to the better deal, is that the company’s fault, the customer’s fault, the industry regulator’s fault or the government’s fault for setting up a system that doesn’t achieve fair prices for most companies?’

And Michael Lewis, Chief Executive of E.ON UK, which has announced plans for a unilateral move away from SVTs in tandem with the roll-out of smart meters, said: ‘A price cap will not be good for customers. It will reduce engagement, dampen competition and innovation. As we have made clear, we believe standard variable tariffs have had their day. Tomorrow should be about helping all customers engage with the market with tariffs that work for them. Therefore the question is ­– why cap it when you can scrap it?’

•   Over 550,000 customers switched electricity supplier in September, up by nearly a half (46%) on the same month in 2016, according to trade association Energy UK. This means over four million customers have changed electricity supplier so far this year, showing that consumer engagement in the energy market continues to grow.