If there is to be a cap, it needs to fit

As first published in The Daily Telegraph yesterday, I’ve written a short piece on the proposals for a price cap in the GB Retail energy market.

With the Conservative and Labour manifestos expected this week it seems likely that some form of government intervention in the energy supply market is now probable after the general election. It appears that some form of ‘cap’ on household tariffs will be introduced.
 
The energy sector is used to being in the political spotlight and in providing homes and businesses with an essential service, such scrutiny is to be expected.  The issue facing energy suppliers like the one I lead is how to respond.
 
At SSE we know customers’ interests are best served by suppliers working with government, not against it. As a major energy supplier we believe customers’ best interests is served by competition, not caps. But if a cap is to be introduced, we will work constructively throughout the consultation and implementation processes; and our focus will be on how to devise a cap that fits the needs of customers, in a way that is sustainable for the period it's in operation.

That said, many independent commentators have noted that a cap could risk restricting customers’ choice of products, damage competition or limit people’s desire to switch – especially if they believe that prices are regulated or if prices become clustered around a mandated cap. These are very possible outcomes if any cap is hastily or badly designed and clumsily imposed into a dynamic and competitive market.  
 
So our dialogue with government, and the regulator, who will ultimately be charged with administering any cap, will be focused on ensuring any intervention has a clear objective and duration; and that any cap is based on robust methodology that acknowledges the complexities, risks and costs that come with supplying energy. Politics aside, supplying energy is not like some other retail sectors. The reality is the issues affecting the energy market are not new and will continue to exist regardless of whether or not government is involved in setting prices.  Two stand out.
 
Firstly, energy prices have increased steadily in recent years. This isn’t due to profiteering energy companies – analysis shows industry profits have remained broadly flat, in our case averaging around £80 a year per customer, making it a relatively low-margin sector compared to other utilities such as mobile phones or broadband. While the recent CMA investigation alleged that energy customers were paying £1.4bn a year more than they needed to, this is very hard to substantiate given it would far exceed the combined profitability of the whole market.
 
Having already delivered significant cost reduction programmes across the business I lead, I also can’t agree that inefficiencies are to blame or that an overnight £100 price cut would be sustainable without other measures to reduce the cost of energy, or stark decisions for suppliers about how to cut costs whilst continuing to deliver decent customer service. It’s also notable that the calls for more efficient suppliers come from smaller, new entrant companies who are still growing their customer base to scale, are exempt from a number of costs facing larger players and have significant customer service issues.
 
We need to acknowledge that prices have risen largely due to volatile commodity prices and increases in the costs of various policies, levied on energy bills, to modernise and decarbonise Britain’s energy system. This is well worth doing, but these costs are set to increase irrespective of whether suppliers, government or Ofgem set prices. Managing these costs, and the risks associated with them, for customers is a big task and there are serious consequences for getting it wrong, as we saw when GB Energy went out of business last year. This shows just how important it is that any cap is set objectively, regularly reviewed and based on a full understanding of market realities and the cost of supplying energy.
 
Secondly there is the issue of competition and customer engagement. Competition is alive and well in the energy market. Government, regulator and companies have focused on making it easier and more attractive for customers to shop around, stimulating competition and bringing down prices in the process. There’s compelling evidence that this is working: last year almost 5 million people switched energy supplier and at last count there were 60 – not six – energy suppliers competing for their custom. As in any market, to win customers, suppliers offer discounts to make it worthwhile for people to switch. In my view it would be a shame to give up on competition when we’re on the cusp of faster switching and tailored, personalised energy tariffs made possible by smart meters.  What would a cap mean for the smart meter roll-out, for example?

The long term vision should be to continue to put competition at the heart of the energy market to continue to deliver even more for customers.  The energy sector is in the midst of major transformation; it’s currently unclear what impact a cap might have on this.
 
We have to accept, and act, on the fact that there remains strong distrust in our sector and I acknowledge we’ve made mistakes in the past. If Ofgem can design any  cap in a way that doesn’t fundamentally undermine the progress that’s been made in the market then that may be an outcome that can work. But that’s a big ‘if’. From our end we will engage constructively whilst not losing sight of the longer term benefits that competition can bring in achieving an outcome that is in customers’ best long-term interests.

About the author

Alistair Phillips-Davies Chief Executive

Alistair became Chief Executive of SSE on 1 July 2013. He has a degree in Natural Sciences and is a qualified Chartered Accountant. He has worked in the energy industry since 1997, when he joined Southern Electric. He was appointed to the Board of SSE as Energy Supply Director in 2002 and was appointed Deputy Chief Executive in 2012. As Chief Executive, he leads the Executive Committee and the rest of the SSE team in the day-to-day running and operations of SSE and is responsible for implementing the strategy and policy set by the Board.

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