Is it lights out for energy price cap?

A recent High Court ruling has given the Big Six hope that the energy price cap's days may well be numbered

Price cap
The price cap was instituted in response to public uproar over punitive energy bills Credit: The Telegraph

Under-pressure Centrica bosses were delighted at the ruling at the High Court in London in November when Mrs Justice Andrews sided with the British Gas owner’s claim that the price cap on customers’ bills had been miscalculated in its early stages, costing the company about £70m.

She also highlighted the “significant time constraints” the regulator Ofgem was under when setting the level of the cap, which was introduced amid huge political pressure.

Welcoming the ruling, the FTSE 100 company, led by Iain Conn, pledged to work with the Government and the regulator on energy policy. But it is unlikely to be the final battle over the controversial policy, under which tariffs for roughly 11 million households were capped, typically at about £1,137 per year – aiming to save customers roughly £76 a year.

Introduced a year ago by Theresa May’s government amid a political furore over customers being ripped off, the cap is fiercely opposed by many bosses who argue it has hobbled their businesses at a critical time for the energy industry.

It is in line to end in 2023 but could be lifted as soon as this year, depending on the regulator’s and Government’s view of how the market has changed. Industry experts are already looking at what comes next. Yet any changes to the cap are politically fraught, leading to doubts that any politician would dare lift it.

Theresa May
Theresa May's Government launched the price cap last year Credit: Dan Kitwood/Getty 

“There’s a fear this could be like income tax,” said one source at a major supplier. “A short-term expedient introduced at a time of political crisis, which never gets lifted.”

The utilities industry may have just seen off the threat of nationalisation from a Labour government under Jeremy Corbyn, but the price cap was originally floated by then Labour leader Ed Miliband in 2013.

It gained traction under the Conservatives following a study by the Competition and Markets Authority (CMA) which claimed that customers were overpaying £1.4bn per year for energy because they had not switched from costly default tariffs.

With chief executives at the Big Six companies earning multi-million pound salaries, including £4.1m in 2016 for Conn, and making record gross profits (about 8.8pc for Centrica against an industry average of about 5.6pc), the sector was cast as the fat cats feeding off vulnerable customers.

The cap on default tariffs was introduced in January 2019, and has been altered periodically in line with costs, from £1,137, to £1,254, £1,179 and then £1,162 on Friday.

From the £1,179 cap, the company is allowed about £21 for pre-tax profit, £446 for wholesale costs, and £56 for VAT. It was approved despite fierce opposition from bosses, including Conn, who argued it would lead to reduced competition, possibly higher prices, cost-cutting and job losses as companies tried to cope with the squeeze.

Some of that has come true – at least among the Big Six which were already suffering from rising competition as new entrants flooded the market amid efforts by Ofgem to encourage competition.

Their share of the market has fallen from about 95pc to about 73pc over the latest decade, while the level of the cap has been blamed for the failure of Npower’s merger with SSE’s retail unit and a £300m hit for Centrica in 2019.

Both are now cutting thousands of jobs, with Npower being folded into German rival E.ON. SSE has quit the retail market, selling its household unit to challenger Ovo in a stark sign of the turmoil.

Consumers have benefited from the cap, with authorities estimating that customers on the default tariff will save more than £1.2bn a year. Warnings from Conn that it would lead to less choice as firms bunch tariffs around the cap have not proven true.

The cheapest tariffs on the market last year were well below £900, according to research outfit Cornwall Insight.

Switching rates are up by about 9pc, and there doesn’t appear to have been a fall in customer service among the larger suppliers. Many industry observers concede that, despite grumbling, it has also caused inefficient firms to raise their game.

However, those successes take place against a market in which few are making a profit, raising questions over how sustainable the competitive market is.

Just under a quarter of the UK’s cheapest energy suppliers have exited the market in the past three years – mostly going bust. 

It means customers are shoved onto possibly pricier tariffs with other suppliers, while failed suppliers have left behind about £255m of bad debt for customers across the market to pay. Major challengers, such as Bulb and Octopus Energy, still make huge losses as they chase growth.

Many companies believe allowances should be made in the price cap to help them pay for such failures. There is also debate about whether they should be given more flexibility so they can invest in products that will help the country move towards a lower carbon economy.

Household energy suppliers will be important to the country meeting its targets for net zero greenhouse emissions by 2050, as they can develop tariffs that encourage the uptake of electric cars, sell more energy from wind and solar sources, and help customers become more energy efficient.

PwC partner Steve Jennings, who heads the firm’s power and utilities practice in the UK, said: “The reality is that even the most efficient suppliers are struggling to make money.

"I think the Government has to accelerate its thinking on what it wants the future energy retail market to look like to support the level of investment that will be required; think about what the market looks like, how it is presented to consumers, what role they want energy suppliers to take in it, and what is an acceptable level of return for the investment they want companies to make.”

Electricity pylons are seen near Tagelswangen
Household energy suppliers will play a key role in hitting carbon net-zero targets Credit: Arnd Wiegmann/Reuters

Bosses are likely to ramp up their arguments over the cap ahead of the Government’s energy white paper, the Budget, and Ofgem’s report on the market in October which will feed into the Government’s decision on whether to lift the cap in December.

Kwasi Kwarteng, the clean energy minister, has said the cap is “making a real difference to the budgets of up to 11 million households.”

Lobbying against it is sensitive as it exists to protect people from profiteering. A senior executive at a challenger supplier said: “They’re trying to make sure it stays temporary. What an awful indictment that they want to take away protections to charge customers more. It would be a great shame to take away the pressure at the exact moment it is most needed”.

As those comments show, there are widely different views across the industry, so little united front to present to government.

The cap tends to harm the Big Six more than the challengers, as the Big Six have more customers on default tariffs, more vulnerable customers, legacy pension bills and creaking computer systems.

“The challengers see the cap hurting the Big Six more than it hurts them, so if they can play the long game and be outwardly supportive, then they potentially stand to lose less,” said one industry source, describing a war of attrition in the industry.

“Ofgem isn’t going to listen to the big firms moaning, because they can say, ‘Your competitors aren’t moaning’. But there is no other market where government would substitute competition for regulation.”

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