Wednesday 7 November 2018

Special Report: Energy price cap – how did it come about?

Welcome to ELN's new series of Special Reports, which gives you an overview of some of the hot topics in the industry.

You've all heard about the energy price cap, discussions about which has been ongoing for a while now - and we've seen and heard mixed reactions from the industry..

Some say it's good news for millions of customers and that it is the "only solution" that will protect customers and still allow innovative suppliers to compete while others have argued it is "not a sustainable solution" for the market and is likely to have "unintended consequences" for both customers and competition.

But regardless of that, Ofgem recently confirmed the price cap will go ahead and come into effect from 1st January 2019 - but how did it all come about?

This feature will take you through that journey.

September 2013

If this price cap sounds all too familiar, it was Former Labour Leader Ed Miliband who initially said his party would freeze gas and electricity bills for every home and business in the UK for 20 months if it won the 2015 election.

The move was expected to save householders around £120 and businesses around £1,800 on average – while costing the larger energy suppliers £4.5 billion.

The Conservative Party, however, said people would have to “pay more for their electricity” under the plans.

October 2013

Former Prime Minister David Cameron dismissed Labour’s pledge to freeze energy bills as a “gimmick” that would drive away business from the UK, depicting Mr Miliband as wanting to live in a “Marxist universe”.

June 2014

While discussions about the price freeze continued, Ofgem announced a full investigation into the energy market and referred it to the Competition and Markets Authority (CMA) after a consultation, which showed increasing distrust of energy suppliers.

January 2015

Labour amended its flagship energy freeze policy to a price cap instead – after suppliers started to reduce bills.

Capping gas and electricity bills for consumers was a key policy in the party's general election manifesto.

Mr Miliband said he would freeze bills until 2017 and help consumers save around £120 a year if he came to power – but critics believed the policy had lost its political clarity due to the fall in energy prices which was caused by the oil price slump.

However, the former Labour leader had argued the Big Six suppliers only cut gas bills by a mere 1% to 5% and electricity bills were not reduced at all despite wholesale energy prices having fallen by an average of 20% over the last year.

In November, the Treasury wrote to all the main suppliers and distributors demanding they pass on the benefits of the fall in oil prices to customers “as quickly as possible”.

The large suppliers had however argued they have to buy their oil many years in advance and that the cost of fuel is only half of their overall expenditure and doesn't take into account their network costs.

While discussions about it continued, the competition watchdog was in the midst of conducting its energy market investigation.

July 2015

The CMA found the Big Six suppliers overcharged householders by 5% or £1.2 billion and small and medium businesses by around 14% or £0.5 billion a year between 2009 and 2013.

March 2016

The CMA's final report revealed excess profits made by the Big Six companies from supplying energy to SME customers amounted to £280 million per year between 2007 and 2014. Around £230 million out of that per year was estimated to be related to microbusiness customers.

It also found householders could have been paying £1.7 billion a year more for their gas and electricity than they would in a competitive market.

The competition watchdog, however, scrapped its previous recommendation of a temporary price cap on the most expensive energy tariffs.

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April 2017

The Tories were accused of stealing Labour’s proposal after the party’s senior MPs confirmed their manifesto would include an energy price cap.

The party said it would allow Ofgem to impose a price ceiling for customers on standard variable tariffs, which are said to be the most expensive on the market.

Ed Miliband had tweeted: “Where were these people for the last four years since I proposed cap? Defending a broken energy market that ripped people off. Let’s see small print.”

The government's announcement to cap energy prices – despite the competition watchdog recommending against it - hit the shares of the big companies, with British Gas owner Centrica and SSE seeing as much as a 5% plummet.

Analysts had suggested Centrica was the most exposed to a price cap and the energy giant had condemned the policy as being against the interest of consumers.

Energy companies have always argued the increase in gas and electricity prices – which was said to have doubled over the last decade – reflected rising wholesale costs as well as the government's environmental levies, forcing them to hike consumers' bills.

May 2017

Prime Minister Theresa May set out plans for an energy price cap, which she said will knock £100 off annual bills for 70% of the market – that's equivalent to around 18 million households.

It also led to a fall in share prices for some of the biggest energy companies – and many openly criticised the policy while a lot of the smaller firms welcomed it.

October 2017

Mrs May confirmed a draft bill to put a cap on energy bills during her keynote address at the Conservative Party Conference in Manchester to fix the “broken” energy market that “punishes loyalty with higher prices”.

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February 2018

The government introduced the bill to Parliament – allowing Ofgem to cap energy tariffs until 2020, with an option of extending it until 2023 and protecting around 11 million households.

November 2018

Ofgem confirms the energy price cap will come into force on 1st January 2019 and the final level of the cap stands at £1,137 per year for a typical dual fuel customer.

Around 11 million households are expected to save an average of £76 a year.

This price cap is temporary and will initially last until the end of 2020 after which Ofgem will review the market and make a recommendation on whether to extend it – it has the option to do so until 2023 at the latest.

What's important to note is that the price cap is not the maximum amount consumers will pay. The savings for individual customers will depend on how much energy they use, the price of their current tariff, whether they have both gas and electricity and how they pay for their energy.

That means someone who uses more gas and electricity in their homes will have a higher cap. The £1,137 cap suggested by Ofgem is based on the usage of a typical consumer.

It seems for now the government has finally put its money where its mouth is despite its initial criticism when Labour floated the idea in 2013 – but it's a case of waiting and watching to see how this policy is going to affect the energy market and whether it will bring about a positive change.

What are your thoughts?