Which customers benefit from the energy price cap, and which do not?
The domestic energy price cap is almost upon us, Prospect convened a roundtable to discuss the implications
“Sticking plaster.” It was the most commonly heard phrase during a Prospect energy roundtable in mid-November. The discussion, convened in association with Co-op Energy, sought to explore the merits or otherwise of the imminent domestic energy price cap. While there was a broad consensus among the politicians around the table, and with Co-op Energy, that its temporary introduction was welcome, there were doubts that a cap would safeguard the key tenets of a thriving energy market—fairness and competitiveness—in the medium to long term.
With a limit already in place for those using pre-payment meters, a price cap for customers on standard variable tariff (SVT) comes into effect on 1st January 2019. Set by energy regulator Ofgem, it will restrict the amount a supplier can charge per kWH of electricity and gas.
The government has chosen to target the SVT as that is the default price plan for customers who fail to actively choose an alternative. Over half of all households in Great Britain are on a default tariff and are typically paying over £320 more than those who actively seek out an alternative. However the recent spate of supplier failures suggests some suppliers may be offering unsustainably low prices.
In February, Business Secretary Greg Clark said: “Energy prices for millions of households on default tariffs are still too high. Our new price cap will guarantee that consumers are protected from poor value tariffs and further bring down the £1.4bn a year consumers have been overpaying.”
Meanwhile, a Business, Energy and Industrial Strategy Committee report, published in the same month concluded that the larger energy companies had “brought this policy intervention upon themselves by raising their prices in 2017 and by failing to take effective action against the overcharging of their customers.” Some energy providers are accused of using higher priced SVT to underwrite cheaper fixed offers that attract new customers.
Wanted: fundamental change
Alan Brown, MP for Kilmarnock and Louden and the Scottish National Party’s Energy Spokesperson, supported the introduction of the cap. Concerns remain, however. “Is the cap itself going to be enough to change the market?” he asked, suggesting it was unclear what the government’s intentions were once the cap ends, mostly likely in 2023. “There’s no plan. For me it’s a much wider issue. We need a fresh approach, to step back and look at what contributes to the cost of energy—what’s the right direction for energy policy including energy generation.”
“It’s just a sticking plaster,” said Yvonne Fovargue, Labour MP for Makerfield and Shadow Minister for Housing, Communities and Local Government. “The price cap is alright for now but we do need a fundamental review of energy policy to explore why this essential service isn’t working for some of the most vulnerable.”
John Penrose, government minister and MP for Weston-super-Mare, said: “Economically, it needs to be only a temporary measure. It’s needed because the way the market is set up at the moment has allowed loyalty penalty pricing to become the norm.”
While more than 5.5m energy customers switched electricity provider in 2017, according to figures from Energy UK, four in every five UK households are sticking with their existing tariff—and typically paying more as a consequence. “One of the fundamental differences between energy and coffee or cornflakes is most of us if we are time poor, lazy or both and don’t necessarily hunt around for the best deals,” said Penrose. “Most of us in those other markets get to ‘coat tail’; we get to benefit from everybody else’s switching behaviour and we get the same prices as the switchers do. That’s not what happens in account markets like energy.”
“It takes time to get the market to behave properly for people who are not going to switch. That isn’t something that’s going to happen overnight,” added Penrose, who cautioned against ongoing intervention in favour of a competitive and “dynamic” market.
“The price cap is a symptom,” said Gillian Cooper, Head of Energy and Retail Markets at Citizens Advice, the statutory consumer advocate for the energy sector. Included in the causes of market dysfunction, said Cooper, was the “incumbency effect whereby some suppliers have been able to offer attractive prices to new customers and cross-subsidise from existing customers they know aren’t going to leave. We need to put pressure on that business model.”
As for winners and losers, Cooper said: “Anyone who is on the price cap, will get some benefit. There will be some reduction in their bills. So in that sense, millions of people will benefit.” However, she insisted that there needs to be a more “fundamental change in the market,” including making it easier for all sorts of people to change suppliers.
Cooper’s call for a fundamental shift was echoed by Matt Vickers, Chief Ombudsman at Ombudsman Services, the independent dispute resolution body. “Unless there’s a change in behaviours and culture and the whole ethos around the system, the short answer is that nobody is going to benefit long term. Something fundamentally has to change in the way that we think about energy.”
“Trust is going to become the resource that we need to develop,” he added. “At the moment the onus is very much on the consumer to hunt things out for themselves. If you think about other walks of life you might want to put the onus back on industry.”
The incumbents and the cherry pickers
If the incumbency effect is one undesirable consequence of the current energy market, the cherry picking of customers by new market entrants might be another. David Bird, CEO of Co-op Energy, warned that some suppliers “are not providing core services such as pre-payment meters or direct debit reviews, and they aren’t training their people to support vulnerable customers.”
“We have seen that when taking over two failing suppliers: Flow Energy [in April 2018] and GB Energy [in November 2016]. We are seeing some really unrealistic and unsustainably low price tariffs which we think are damaging to the market.”
“There are some really credible smaller suppliers,” added Bird. “This isn’t about scale, it’s about calibre of management, the ethos of the organisation. There are a large number of players who are not credible.”
Mary Starks, Director of Consumers and Markets at Ofgem, said she was alert to untenable pricing. “We’re looking at tightening our licensing conditions so we have some kind of a check to ensure companies have a sustainable approach to pricing in the market. There’s a balance to be struck because you still want innovative companies to be able to come in and try something that hasn’t be tried before. So we’re not saying you have to have a pricing approach that we’ve seen work 20 times before but you have to at least be able to articulate how it stacks up in a sustainable way.”
“I’m very keen that new entrants are able to enter the market by offering discounts. You open a restaurant; you want to be able to offer 2-for-1 on puddings for the first month just to get the traffic through the door… but we need more visibility on what is the sustainable price point.”
Ofgem will strictly control any green tariff exemptions from the cap. “We were very keen that it did not become a loophole in the price cap.” As a result, Ofgem requires suppliers to prove that customers have actively chosen the green tariff. “And the tariff has to provide some genuine green benefits,” she added, stating that it shouldn’t be possible for cynical suppliers to “greenwash their SVT and get out of the price cap.”
Protecting vulnerable customers
Among those the price cap has been designed to protect are the vulnerable, a wide-ranging and ill-defined group that includes those without the necessary IT literacy or lacking internet access, and those with long term health conditions, disabilities and other impairments. Among all of those groups are pockets of older people. “It’s not that older people aren’t savvy and don’t use the internet—many of them are and do—but there are many older people in that group of vulnerable customers who can’t engage,” said Phil Mawhinney, Policy Manager at Age UK. “So we welcome protection for them. We strongly supported the vulnerable customer safeguard tariff which was superseded by the SVT cap. So in the absence of it we welcome the SVT cap but in the longer term we would look for ongoing price protection for vulnerable customers.”
“The reality is one size doesn’t fit all with these policy interventions,” said Richard Neudegg, Head of Regulation at Uswitch, the comparison and switching service that last year helped over a million customers switch supplier. “I do think there is some value in people engaging in the market and switching. It’s also important to protect vulnerable customers and they would actually be better protected by something more significant. We need targeted interventions to address all those different customer types.”
He added: “The people who have engaged with the market and made active decisions—not just switchers but those that have made active decisions within their supplier—they will undoubtedly lose out financially as a result of the price cap because, by definition, it’s a rebalancing exercise. It’s a political decision, and a smaller pricing differential.”
“If you want a market where everyone pays the same price, that’s fine. You might as well nationalise the market and go on your merry way. But if you want competition to operate, there does have to be an incentive to get some benefit from switching.”
Can’t remove the cap
While the price cap may keep costs in check, consumers need to face up to the economic realities of the energy transition, said Neil Strachan, Professor in Energy Economics, UCL Energy Institute. “If we are trying to get a secure, low carbon energy system it’s going to cost more at least in the short to medium term,” he said. “If you don’t do the energy transition then the most vulnerable people will be the ones to lose out in the long term because they are the ones that suffer from insecure supply or poor environment.”
A sticking plaster it might be but don’t be surprised if the price cap takes longer to pull off than planned. “Once you put them on they are very hard to take off,” noted Ofgem’s Mary Starks. Rent control was introduced in New York to aid returning service personnel after the second world war. It remains in place today. “It will take some political will to remove the energy price cap because no matter how good the post-cap solution is, at that particular moment in time there will be some winners and some losers.”
“It’s going to be really hard to remove the cap,” said Martin Brough, Director of Utilities Research at Deutsche Bank. “There are bound to be people who end up paying more if the cap is removed. At the moment fairness as a political concept is dominant over competitiveness and I can’t see that changing. My concern is that there’s a huge inertia once the price cap is in place.”
“Which customers benefit from the energy price cap, and which do not?”, a Prospect roundtable in association with Co-op Energy took place on Monday 19th November 2018
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