The Cap Must Fit
The Secretary of State, Greg Clark, recently wrote to all major suppliers confirming that the Price Cap Bill was being introduced to Parliament. If the Bill receives Royal Assent, it will cap standard energy prices until at least 2020.
In my response I stressed that we share government’s aim of ensuring all customers receive a fair deal for their energy and excellent customer service. I also highlighted, however, our belief that capping prices will not benefit customers in the long-term.
Evidence shows the GB energy market is highly competitive and that competition is intensifying even further. There are now over 60 suppliers active in the market, switching rates are at record levels and one in five customers are supplied by small and medium suppliers. Switching rates this February were up 60% year-on-year. At the same time the smart meter roll-out is in full swing and switching times are being drastically cut.
An absolute price cap is a significant market intervention and, if introduced, I have very real concerns it could undermine this progress and discourage investment in the GB energy supply sector, which would harm customers’ interests.
I understand and respect politicians’ interest in energy – and would be the first to admit that the industry isn’t perfect – but, if there is to be an absolute price cap it’s vital steps are taken to mitigate the potential impact on the competitive market. As MPs and Peers begin the important work of scrutinising the legislation, there are key questions still to be answered.
Firstly and most importantly, the methodology used to set any price cap must be workable. We’ve consistently been one of the most efficient large suppliers in Britain. However, even from our relatively low base, we’ve found the existing methodology used by Ofgem to set price caps for smaller groups of customers (such as Pay As You Go customers) does not accurately reflect the costs of supplying energy in a responsible and sustainable way. It also ignores the significant cost of delivering the smart meters roll-out.
Given how critically important and difficult the task of setting the cap will be, suppliers should have the right to appeal the level of the cap on the merits via an independent expert body such as the Competition and Markets Authority. This isn’t about delaying implementation, it’s about protecting customers from the unintended consequences of getting it wrong, including stifling competition and deterring potential new entrants and investment.
Secondly, if there is a genuine desire to encourage and preserve competition, greater clarity is needed around the conditions under which a price cap would be removed. Since the Pay As You Go customer cap was introduced, we have seen a significant decrease in switching rates for these customers. If a market-wide price cap has the same effect on a larger scale, the cap could become self-perpetuating, discouraging switching and actively working against effective competition. We therefore need clear agreement on success criteria for the cap and criteria for its removal in 2020. This would allow suppliers to consider how to target their efforts to improve outcomes for customers during the interim period.
This is a significant moment for the future of the energy supply market in Britain. Getting the right answer to these questions is critical; firstly, to help minimise the serious potential for unintended consequences on the competitive market, secondly, to ensure customers derive the maximum benefit from the Government’s transformative initiatives and supplier innovation and, thirdly, to ensure suppliers can continue to operate sustainably and the GB energy supply sector remains attractive for investors.