Price caps: the industry responds

The government will today publish new legislation that will allow it to take powers to direct Ofgem to set a price cap for all energy customers. Meanwhile Ofgem has published proposals to extend its price cap for vulnerable customers. Legislation and consultation mean neither measure will go into effect this winter.

A third action will take effect immediately: from now on energy companies can ‘roll over’ customers onto new fixed deals when their existing deal ends. Previously they had to be switched to the standard variable rate, a measure that was intended to ensure they were not locked into a new deal they had not chosen, but one that frequently meant they ended up with a price hike.

Comment on the ‘roll-over’ decision
Wilfrid Petrie, chief executive of Engie E UK & Ireland, said: “Until now Ofgem has required energy providers to move their customers onto standard variable tariffs as a default – this is so that customers are not locked in and to make the switching process easier. 
“… all ENGIE customers will now automatically be rolled on to a fixed term tariff at the end of their contract, giving them peace of mind that their bills will be competitive, clear and predictable – with no penalty if they choose to switch supplier.
Comment on the price cap plans

Gillian Guy, chief executive, Citizens Advice: “The Prime Minister’s announcement of a cap on energy bills could provide a solution to the runaway energy costs that the millions of people on default tariffs have faced for years.

“We’d encourage the government to look at what it can do to help households in the short-term, recognising that legislation can take time, including ensuring that protection for low-incomes pensioners and families comes into force this winter.

On Ofgem’s action: “It is right that whilst the government works to tackle the cost of default tariffs through legislation, Ofgem is taking action to make energy bills more affordable for the poorest loyal customers – and looking to extend the safeguard tariff to more of the worst off as soon as possible. Energy firms must continue to take responsibility for getting more of their customers onto better value deals over the next few months.

Jon Davies, founder of switchingenergy.co.uk, said: It’s positive to see that action is being taken to support the poorest and most vulnerable people in our society, and we appreciate and understand that this kind of intervention is necessary. 

 

“…There are millions of non-vulnerable customers who remain on poor-value legacy Standard Variable Tariffs (SVTs). Potentially, they’ll be paying between £200 and £600 more per year for their dual-fuel energy bill versus the best tariffs in the market. And, by not switching, they’re indirectly subsidising the savvy switchers who are constantly moving to the best tariff once their existing deal ends.

“The people on SVTs are typically apathetic and disengaged, and are therefore not taking part in what is, in reality, a price-competitive market. All parties involved therefore need to be focused on education and driving action. “.

David Gilchrist, partner at law firm DWF, said: “The energy price cap will face huge resistance. It will turn the supply market into a far more challenging environment, inevitably leading to less rather than more competition in the market. And, overall, this will be bad for customers. 

“While the sentiment is right, the price cap fails to address the root of the problem. Statistically, vulnerable customers – who this price cap is intended to protect – are the least likely of all customers to switch suppliers. More needs to be done to make sure these customers are getting the best deal they can, rather than the worst deal available simply being subject to a government cap.”

Ryan Thomson, Partner at Baringa Partners, said: Ofgem’s announcement that it will extend its prepayment price cap to one million more vulnerable households this winter is a step in the right direction.

“A targeted cap can be implemented more quickly and easily than a broadbrush one, and will have a faster impact on individuals who stand to benefit most from market level protection. These vulnerable customers are already known to the industry through the Warm Homes Discount Scheme, which the safeguarding tariff can be added to without the need for new legislation. Energy companies are more likely to support an extension to an existing scheme, particularly as it’s aimed at vulnerable customers.

“…Ofgem knows that trying to provide protection for the market as a whole through a single price cap is a recipe for legal wrangling, especially given the CMA’s rejection of market-wide price controls last year and strong opposition among industry players. 

“Ofgem’s previous decision to grant Pure Planet a derogation to support their tracker tariff – allowing it to quickly vary its prices to reflect changes in the cost of supply – can only help the move towards a smarter and more competitive market and we welcome the news that Ofgem are introducing new rules to remove any barriers for suppliers to offer new fixed-term contracts at the end of customers’ existing deals. This move suggests that the market may well correct itself before the government can apply any industry wide price cap.

 

Justin Bowden, GMB National Secretary, said: Today’s announcement falls short of the boldness needed to protect every bill payer in the country from excessive profiterering by the energy companies and the care required to also ensure sufficient resources in the system to pay for the vital infrastructure needed to maintain our power networks. GMB were amongst the initial proponents of an energy price cap because the very idea of a competitive market in a natural monopoly is a contradiction in terms – hence the need for a price cap. 

“GMB has long argued that Ofgem should be abolished and Theresa May could have been bold today and done just that. 

…“Government should also have powers to limit profits and, where necessary, to finance and run power stations.

 

 

 

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