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How soon is now? May enables energy price cap

Tom Crisp Tom Crisp Editor
4th October 2017
How soon is now? May enables energy price cap

After months of speculation, a manifesto commitment and an election, the government has finally decided to act in terms of domestic energy supply markets. The move was confirmed as one of the key announcements of Prime Minister Theresa May’s speech to the Conservative Party Conference this morning. The Prime Minister stated that the government would “always take on monopolies and vested interests when they are holding people back”, saying one of the “greatest examples in Britain today is the broken energy market.” She went on to say that the energy market punishes loyalty with higher prices and to correct this, the government will meet its manifesto commitment and publish a Draft Bill to put a price cap on energy bills, bringing an “end to rip-off energy prices once and for all.” The Draft Bill will be published next week. The speech contained nothing about the detail of intervention or their ramifications.

Whilst detail is still scarce, more information was revealed in an announcement to the markets by BEIS. On first appraisal of the language used to describe it, it appears that intention is that the bill will be, like most legislation, establishing enabling powers rather than setting out prescriptive outcomes. It will not see the government taking powers to introduce a cap directly, but provide powers to allow Ofgem – who were expected to make an announcement on actions they were going to take imminently – to go further than what may be possible under their current vires.

The intention is that the bill will afford the regulator powers to put a safeguard tariff in place on energy bills which “would apply to households in England, Wales and Scotland for customers on Standard Variable Tariffs and other default tariffs”. The word “on” doesn’t mean all customers subject to such tariffs, although Conservative Headquarters have issued a briefing note saying the powers would allow Ofgem to issue a cap on SVTs over the “whole market”.

Crucially though, this doesn’t mean a market wide SVT cap will result. The government are clear that it will be for Ofgem to consult on how any cap will operate. Importantly, they have also stated that the intention is that a cap introduced under the powers contained in the bill would be a temporary measure, the need for it would be kept under review, with a backstop date set for removal of the cap. The BEIS markets announcement also stresses that Ofgem would need to have regard to the need to maintain incentives for switching, and for suppliers to innovate, compete and finance their business as well as protecting consumers. So, some balancing factors which introduce a requirement to think more widely about sustainable business models and competitive indicators in the current market and how intervention could impact on them. Finally, it is also worth considering that the Draft Bill will be published for pre-legislative scrutiny and, like all bills, could be subject to change.

What then is the impact of this? In the immediate sense, the reaction from the market has been significant – Centrica’s share price hit a 14-year low, before rebounding somewhat. The reaction from stakeholders has been swift. Energy UK has highlighted the lack of action on energy efficiency which could deliver real benefits, while the CBI labelled the move as an example of “state intervention that misses the mark”. While Citizens Advice has welcomed the announcement, it has flagged that legislative action “can take time”.

We think that it will probably take the regulator to indicate how, or if, it intends to use these new powers before the market can properly assess the true impact of the announcement, and the ball will now be in Ofgem’s court. For their part, Dermot Nolan had already previously stated he would welcome additional powers in order to avoid a “substantive appeal route” upon implementation of price caps.

What is clear is that this continues the trend of governments flexing muscles in this sector. The government wish to be seen to be doing something on this issue to force the pace and provide the regulator with suitable ammunition to go as far as it deems necessary, but with the ownership and responsibility for the eventual action resting with Ofgem.

We continue to be sceptical that price caps will prove effective in protecting consumer interests. But, from the moment credit SVTs rose above their capped PPM equivalents in the spring, further political intervention has always seemed likely. While May’s announcement may play well politically, the mechanics of the legislative timetable could mean the use of the powers may not be available for some time to come, pushing perhaps into next year or even later. There has been a window of opportunity for suppliers to make a convincing case to limit the creep of price intervention by taking a lead in recent months. British Gas, for example, stalled its recent SVT increase for its Warm Home Discount customers until after the coming winter has finished. This window may remain open, although the length of that depends on Ofgem’s next move.

Our research shows that the announcement has come at a time when all the evidence is showing that the market is becoming increasingly competitive. Switching levels have rebounded, a fifth of households are now served by small and medium suppliers and the CMA’s remedies and interventions have scarcely had the chance to be taken forward. Broadening the powers for the regulator to intervene so widely is one thing, but we continue to believe that such powers should only be used after careful consultation so that they avoid unintended consequences that inadvertently damage the evident and growing levels of competition in the market.

We will be considering the commercial impacts of the proposals in the coming weeks as we build up to our annual conference on retail energy markets on 22 November.

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