The Energy Price Cap: The good, the bad, and the consequences

Dan Wright | 01 July 2019 | Loughborough, UK

A history of public distrust in energy suppliers[1], a growing concern about rising energy prices and predatory tariffs seeming to target more vulnerable customers resulted in the inclusion of a cap on household energy prices in the Labour, Conservative, Scottish National Party and Green Party manifestos[2] published on the run up to the 2017 snap general election.


The default tariff energy price cap came into effect on the 1st of January 2019. This places an upper limit on the cost of gas and electricity per kilowatt-hour[3]. Six months in, this article investigates the benefits and detriments of the energy cap and considers the potential consequences, whether unforeseen or expected.


The context of the cap


In 2016, the Competition and Markets Authority estimated that customers had potentially been overcharged by £1.4 billion, with 12 million households remaining on poor value variable tariffs, where they may pay up to £300 more than they would on other available tariffs[4]. This could be down to a multitude of reasons: Perceived difficulty in switching provider, loyalty to a reliable supplier, disinterest, or perhaps barriers to access.


While news sources had reported the potential of total energy bills being capped at approximately £1,136[5], the current regulatory instrument instead places a maximum price on each kWh of electricity or gas purchased (or consumed). The current bill proposes that these caps be temporary until 2020 (or potential 2023) to allow for consultation and re-evaluation of the regulatory tool.


The good


The energy cap is an example of the regulator stepping in to revise a market which is not being seen as functioning effectively as a competitive system. The energy cap steps in to remedy this issue by setting limits to how much suppliers can charge and protecting disengaged consumers from rates that are considerably higher than the cheapest available.


The cap also progresses the UK government’s longstanding efforts to combat fuel poverty. In 2018, Energy and Clean Growth Minister Claire Perry MP announced that energy providers with at least 150,000 customers[6] would need to start offer an annual Warm Home Discount of £140 to vulnerable households. The energy cap supports the impact of this discount, by targeting the reduction of annual energy bills, which is intended to benefit the vulnerable as well as others that may be paying for energy on expensive tariffs.


The bad


While seemingly having a people-centric and social inequality-tackling motive, there are outcomes of the bill which may result in negative outcomes for millions of energy users. When scrutinising an earlier version of the energy cap bill, the Department for Business, Energy and Industrial Strategy (BEIS) Committee proposed that:

Consumers who do not engage with the market should expect to pay more for their energy[7].

Facilitating engagement with the market could have been sought through provisioning supplier-unaffiliated bodies to act as intermediaries for customers to benefit from cheaper energy tariffs (operating in a similar way to companies like Labrador, Flipper and Migrate) – the pros and cons of which are for another article! Instead, specific limits have been set to protect consumers, and suppliers are responding to the regulation-stipulated reduction of the height of the energy tariff ceiling by raising the tariff price floor…

While the OFGEM energy cap had not affected those engaged with the energy market, like Luke Skywalker and the gang, the supplier tariff price hikes may mean average bill rises and fewer opportunities to get better deals by shopping around.

The consequences


At the time of writing, each of the ‘big six’[8] energy suppliers have raised the cost of their standard variable tariff to match OFGEM’s price cap[9]. Speaking with the Telegraph, the chief executive of Bulb Energy (who claim to be the UK’s biggest green supplier) Hayden Wood, said: “The price cap, which Bulb supports, was meant to be a maximum and not a target. It’s disappointing to see larger suppliers setting their standard tariffs as close to the cap as possible – squeezing every last penny they can out of families” (see Figure 1).


Figure 1. This graph from OFGEM[10] visualises how the energy cap on standard variable tariffs (SVT) could be seen as acting as a target for energy suppliers as opposed to a limit to pricing.

To the author’s understanding - Bulb may not be worried by the cap, because as a green tariff they will be exempt. What about suppliers who will have needed to shift their prices as a result of the cap? Iain Conn, Centrica’s chief executive told the BBC’s Today programme (Radio 4) that he was projecting a £300 million loss in profits. Not surprisingly, he quoted as saying: “We have not been supportive of price controls in a free market”[11].


Opinion


Five of the big six energy companies are for-profit organisations (EDF became a French public company in 2004) and as such have an obligation to deliver return on shareholder investment. Loss in profits will therefore need to be met with increased efficiency and/or increased prices for customers to make up the £1.4billion which OFGEM deemed to have been the product of overcharging. I found evidence for this price rise when analysing tariff prices and comparing the average of the six cheapest tariffs as of 11 October 2018[12], an indicative tariff of standard variables as of October 2018[13] and a tariff set at the energy capped rate as of April 2019[14] (Figure 2). We can see that the price of energy seems to be continuing to rise. It could be suggested that the energy cap is not tackling the high priced standard variable tariff, but instead normalising it.

Figure 2. SEEBORD, monthly direct debit, dual-fuel energy bills for low, medium and high energy consumers[15] as a percentage of average gross household income of households within the lowest income quintile (£15,495 and below) as defined by the 2016 English Housing Survey[16]. A midpoint of £7,747.50 was used to calculate the percentages.

In concept, an energy cap is beneficial for protecting the most vulnerable customers: those who may have been unfairly targeted by suppliers as easy profit boosters. However, what was a cap on tariffs has transformed into a target, raising energy prices for all. Watch for the results of the Centrica legal action against the cap which may be a life raft for many suppliers especially as short positions rise in bets against the success of British Gas[17] .


To me, the energy cap feels like an ineffective remedy to disparity in energy billing. Rewarding energy customers who frequently switched supplier with lower-than-average bills was resulting in customers who did not want to or were unable to switch were being overcharged. Automatic switching facilitated by supplier-unaffiliated third parties was touched on previously in this article, and I feel this could have been an alterative means of tackling the issue. Would energy suppliers continue to make a profit if market-beating tariffs advertised to collect new customers were suddenly taken up by millions? Perhaps not.


Dan Wright is a doctoral researcher with the School of Architecture, Building and Civil Engineering at Loughborough University funded by the EPSRC London-Loughborough (LoLo) Centre for Doctoral Training in Energy Demand (Grant No. EP/L01517X/1) and supported by Simble Solutions Limited, an innovative, Australia-based SaaS specialist.



Note: The trials and tribulations of sourcing energy tariff data


While I logged the cheapest dual-fuel tariffs in October 2018 as part of a separate project and was able to obtain quotes for April 2019 by going directly to suppliers, I have relied on a secondary source for comparable retrospective October 2018 standard variable tariffs. An unsuccessful Freedom of Information request meant I was unable to get the raw tariff data to conduct a more robust analysis. Should historical data be publicly accessible? Let me know your thoughts in the comments section below!


Appendix


Table 1. Calculated average annual dual-fuel prices for low, medium and high energy users using cheapest tariffs from 11 October 2018.

Table 2. Calculated annual dual-fuel prices for low, medium and high energy users using representative standard variable tariff from October 2018.

Table 3. Calculated average annual dual-fuel prices for low, medium and high energy users using capped standard variable tariff from 5 April 2019.

Endnotes & References

[1] Public attitudes to the household energy market (Rogers de Waal, 2017)


[2] How do the party manifestos compare on energy? (Watson, 2017)


[3] For more information on kilowatt-hours (kWh) as a unit of energy, check out The Engineering Mindset


[4] Energy market investigation – Summary of the final report (Competition and Markets Authority, 2016)


[5] Energy price cap to save households £75, OFGEM says (Read, 2018)


[6] Previously, only suppliers with more than 250,000 customers were obliged to offer the annual discount (Goodman, 2018)


[7] BEIS Committee, Pre-legislative scrutiny of the draft Domestic Gas and Electricity (Tariff Cap) Bill, Fourth Report of Session 2017-19, 13 February 2018, para 38


[8] The big six UK energy suppliers are British Gas, EDF Energy, E.ON UK, nPower, Scottish Power and SSE.


[9] Higher wholesale costs push up default and pre-payment price caps from April (OFGEM, 2019)


[10] https://www.ofgem.gov.uk/data-portal/retail-market-indicators


[11] https://www.bbc.co.uk/news/business-47315841


[12] Cheapest SEEBORD dual-fuel, monthly direct debit tariffs from www.ukpower.co.uk accessed on 11 October 2018. Gas = 2.838p-2.859p (average 2.848p) per kWh, £74.57-£142.82 (average £97.79) annual standing charge | Electricity = 12.376p-13.119p (average 12.736p) per kWh, £77.93-£142.82 (average £96.80) annual standing charge.


[13] A SEEBORD dual-fuel, monthly direct debit tariff from October 2018 from one of the big six suppliers. Gas = 4.281p per kWh, £54.75 annual standing charge | Electricity = 17.84 per kWh, £54.75 annual standing charge. This is unverified and should be only used for illustration


[14] Following a set of SEEBORD dual-fuel, monthly direct debit requested and provided on 5 April 2019 the energy cap is understood to be at approximately: Gas = 4.26p per kWh, £96.76 annual standing charge | Electricity = 20.55p per kWh, £83.64 annual standing charge.


[15] Proposal to revise the typical domestic consumption values for gas and electricity (OFGEM, 2017)


[16] Detailed household expenditure by gross income decile group (Office of National Statistics, 2016)


[17] Disclosed so-called short positions in the Big Six energy supplier have risen to nearly £86m from zero at the beginning of February http://www.cityam.com/275512/hudge-funds-take-out-86m-bets-against-british-gas-owner

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