After a period of procrastination the UK government is allegedly moving to put a cap on energy prices. This is the first intervention in the energy market since privatisation 30 years ago. It has certainly upset some of Mrs May’s more right-wing back-benchers who believe that interfering with market forces damages competition.
What the government has done is to promise parliamentary legislation to enable the hitherto toothless regulator, Ofgem, to cap the standard variable tariff (SVT). This is the most expensive of the tariffs levied by the ‘Big Six’ oligopoly of energy companies (British Gas, EDF, E.ON, SSE Scottish Power, and Npower).
This oligopoly dominates the UK energy provision retail market to the tune of 80 per cent. Mrs May has said the cap would save the average electricity and gas consumer £100 a year from their bill.
This latest phase of the saga of trying to remedy perceived consumer rip-offs in energy started back before the 2010 election when Ed Miliband the leader of the Labour Party said, if elected, he would cap energy prices. As we know, he wasn’t elected but his threat lingered and spooked the new prime minister, David Cameron, sufficiently for him to ask the Competition and Mergers Authority (CMA) to look into the situation.
The CMA took a long time but when they finally reported early in 2016 they said that the Big Six were indeed ripping off consumers for about £1.4 billion a year. Part of the reason for this was the SVT. The CMA recommended that consumers shop around and switch to a cheaper supplier who offered fixed rate tariffs.
For the most of 2016 and early 2017 it looked as if the recommendation was working. It is estimated that by June this year more than 3m people had switched to the more than 20 or so small groups, some of which have suitable catchy names like Ovo, Bulb and Spark Energy, that entered the market.
These groups offered deals which came in lower than what Ofgem described as an annual bill of £1066 for an average UK household. British Gas, the largest UK supplier lost some 400,000 customers to switching in the second half of 2016 and 216,000 in the first half of this year. And this started to impact on British Gas’s bottom line.
Despite the switching, in spring 2016 five of the Big Six utilities announced price rises of the order of around 8 to 9 per cent blaming “green tariffs” and the sharp rise in wholesale energy prices caused by the depreciation of the pound following Brexit and the resulting effect on the price of imported gas.
British Gas postponed its planned 12.5 per cent increase until August, perhaps hoping the threats to cap energy prices would not materialise and knowing that in spite of the haemorrhaging of customers to other suppliers there were still an awful lot of its consumers who could not be bothered to switch or found it difficult to do so,.
Their gamble seemed to work. The government pledge for a cap was quietly dropped from the manifesto for the general election of June 2017. Iain Conn, the Chief Executive Officer of Centrica, which owns British Gas, probably sighed with relief. But pressure continued to build. The Big Six energy companies suffered a record exodus of more than 160,000 customers to smaller rivals in September.
Much of the migration was said to have been spurred by British Gas’s implementation of its 12.5 per cent price increase on September 15 for 3.1m of its customers. Estimates are that this would cause their joint gas and electricity bill to came in at over £1,200 a year. Finally, in mid-October, the government announced that Ofgem would be given the power to cap the SVT until 2020. A deadline which could be extended to 2023 if needs be. The cap is expected to affect 12m households.
The question is will it work? Dermot Nolan the chief Executive of Ofgem has said it could take five months for the regulator to implement a cap after the bill receives royal assent. Others have said it could be 2019 before the cap is in place. The danger with this is that consumers will continue to pay high bills for another year at least. Also they may be lulled into a false sense of complacency that prices seem to have been fixed and there is no need leaving the Big Six suppliers.
Sir Ed Davey, the former energy minister in the coalition government has said the Big Six will fix the SVT just below the level of the cap. This will encourage the smaller suppliers under pressure from volatility. Also customers who didn’t switch but stayed with one of the Big Six under a cheaper fixed rate deal could find their bills shooting up again if their cheaper deals end in 2018.
Overriding all of these considerations is the thought that the government might have to set the cap higher than it is today to take into account the costs of extending a major £3.6million energy efficiency programme across Britain’s homes via bills. The government has set out a decade long clean growth strategy which extends the insulation programme known as the energy companies obligation (ECO). This is still funded via energy bills despite calls for it to be funded from the general tax net.