Ofgem price cap proposal

Energy price cap – a fairer deal maybe, the best deal – definitely not

Ofgem, the gas and electricity regulator, proposed a price cap for 11 million households on what it called “poor value default deals”.

This takes us one stage closer to realising what Prime Minister Teresa May promised at the Tory Party conference on 4 October 2017 – to bring an end to rip-off energy prices once and for all.” But will it? Time will tell.

As a reminder, Standard Variable Tariffs (those primarily covered by this proposal) are tariffs which customers who have never switched are placed on. They are also the tariff onto which a customer who, having switched and come to their tariff end date, will be placed onto unless they make a proactive decision to move to a different product or to switch supplier. These tariffs are expensive, often the energy supplier’s most expensive tariff. Furthermore, because of widespread disengagement in the energy market, the majority of customers (current estimates show 50%+) are on these expensive tariffs.

The Proposal summarised

11 million households on standard variable and other default tariffs will see an average price cut of £75 a year.

The price cap for a dual fuel customer paying by monthly direct debit will be set at £1,136 a year.

The price cap for a dual fuel customer paying by cash or cheque will be set at £1,219 a year.

The price cap is expected to come into effect at the end of this year (2018).

The price cap will be reviewed and updated every April and October.

The cap will initially run until 2020, unless Government decides to extend the cap for a further 12 months. Government can extend the cap only three times. The cap must end by 2023.

From 2020, Ofgem will assess whether conditions for effective competition are sufficient for Government to remove the cap.

Some initial observations

Of the Big 6, ScottishPower customers will see the biggest initial benefit seeing their bills fall by between £121 and £138 a year.

SSE and British Gas customers will see the lowest cuts (£57-£60 and £69-£72 respectively) because they are already benefiting from below average energy bills.

The price cap will still see “protected customers” paying at least £200 (20-25%) more than competitive market rates.

Implications for energy suppliers

If energy consumers are going to pick up a saving of £1 billion as a result of these proposals (Ofgem estimates) then, on the flip side, energy suppliers will take a revenue hit of exactly the same magnitude.

The vast majority of the revenue hit (90% or so) will fall onto the income statements of the Big 6. Smaller suppliers however are not immune and life will not get any easier for the many small, unprofitable and poorly funded energy companies out there. Time will tell how bad it will get but we will be looking into the potential impact of this in a later piece of analysis.

Joe Malinowski, founder of energy price comparison website energyscanner.com commented.

“Customers on Standard Variable tariffs are set to get a better deal, but it definitely won’t be the best or even a particularly good deal at that. The real danger for consumers is that they will get lulled into a false sense of security and end up overpaying for their energy year after year after year.”

Joe Malinowski, concluded.

“Government intervention and support can only get you so far – in this case £75. If you want to pick up the really juicy savings, another £200 on top, then you need to find those precious 5-10 minutes to do a comparison and switch energy supplier.”

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