Back in the heady days of 2013, pre-Brexit, before “nothing has changed”, THAT exit poll, and the promise of a strong and stable government, the former Leader (now lead comedian) of the Labour Party, Ed Miliband, introduced the idea of a cap on energy bills. It was instantly labelled as a “lurch to the left” (The Sun), “flawed in practically every way” (Times), and a move “back to the bad old days” (Daily Mail).

Theresa May’s energy price cap (currently winding itself through pre-legislative scrutiny) in contrast is “a crackdown on energy rip-offs” (Daily Mail) and “attempt to capture the political centre ground” (Sunday Times). Backed up by the excoriating Competition and Market Authority (CMA) Energy Market Investigation, published in 2016 following a two-year review of the industry, May secured political and media backing for a policy which goes against natural conservative values.

The fundamentals are simple, to save consumers from rip-off energy bills, but the overall impact on the market is only now becoming clear.

 

Will a price cap work?

In essence, yes.

The much-quoted £1.4bn detriment in the market is the key figure to be aware of. This is the margin the CMA stated consumers were overpaying for their bills. The government, and Ofgem by extension, aim to substantially decrease this, or eliminate it entirely, by 2020 at best, or 2023 at worst.

The majority of this £1.4bn is sourced through customers on Standard Variable Tariffs (SVTs). Currently over 13 million customers are on non-price protected SVT contracts. These consumers are on average charged £292 (Ofgem) more than a comparative fixed price tariff available on the market. The legislation in its current form tackles these SVTs directly. By capping what suppliers can charge for their basic rate – not including fixed price tariffs or separate deals – the government is aiming to save consumers an average £100 off their bills.

Much of the evidence from the recent BEIS Select Committee pre-legislative scrutiny of the Bill concurs with this synopsis. Essentially, a price cap will decrease energy bills for the 13 million consumers on SVTs by mandating the methodology from which it is calculated.

 

But…

… the sharp eyed amongst you will notice that there is a big discrepancy between the £100 savings quoted by government, and the £292 savings currently available on the competitive market.

The key figure to be aware of here is 5.5 million. This is the number of consumers who switched energy deals in 2017 – a 15% increase on 2016 figures (Energy UK). The potential to switch supplier has increased hugely in the last few years, made possible by the entrance of small and medium players who can offer highly competitive deals to new customers through either direct advertising or price comparison websites (PCWs), such as MoneySuperMarket.

The 13 million consumers languishing on SVTs are those who are utterly disengaged from the market. If even half of these consumers were to switch supplier or engage with their current operator to gain a better deal, they could save £1.9bn in bills. Compared to £650 million using the current £100 saving offered by the government price cap – it is clear which is the better solution. If switching rates were to double by 2020, the £1.4bn detriment will have disappeared, with interest.

So why isn’t the aim to “put a booster rocket behind [switching]” as Mark Pawsey MP stated so bluntly in the most recent oral evidence session? Not even the new Minister, Claire Perry, was clear on this point, suggesting that 83% of households have yet to switch, and likely never will.

Depending on your viewpoint, the price cap is either a necessity in order to benefit the 13 million on SVTs, or the wrong solution to the question of how to increase engagement in the market. Fundamentally, a price cap will almost certainly decrease the estimated £1.4bn consumers have been overcharged, but this creates losers as well as winners. Those currently on the cheapest tariffs will most likely see their bills rise as tariffs bundle around the cap – which has occurred on the only comparative policy, the Pre-Payment Meter Cap enacted earlier in 2017. Likewise, those who are on SVTs and do see their bills decrease through the cap (the supposed winners), will see a lower gain than they would have found had they switched prior to the Bill coming into force in a competitive market.

 

Will the price cap come into effect?

This is the source of a current bet in the Atlas office, with one Director convinced it will not, or will be amended in such a way as to make it a non-entity upon completion. This Consultant however is less sure.

It was in both Labour and Conservative Manifestos, is backed by both leaders (however shaky their tenure may be) and is one of the very few policy initiatives that voters are aware of outside of Brexit. If it goes through, Labour will claim it was their policy all along. Likewise, the Conservatives will claim they are intervening in broken markets and crony capitalism. This is almost too big to fall.

The government is determined to see this gain Royal Assent by Summer recess so that Ofgem can implement it in time for Christmas 2018. We’ll look forward to seeing how this progresses over the coming months.

 

Atlas Partners is currently working with clients on the potential impact the price cap may have on their core business. If you’d like advice on how it could affect your day-to-day operations, get in contact with the team.

Comment