UK to Set Absolute Retail Price Cap until 2020

Update as of 12.30pm GMT with link to draft bill in 3rd para

The UK government's Department for Business, Energy and Industrial Strategy [BEIS] issued a statement on October 12 saying that, later this morning, it will publish, for pre-legislative scrutiny, a draft bill to cap energy prices.

It represents an about-turn for what was the first EU country – two decades ago – to pioneer the use of deregulated markets and price regulation independent from government.

The government duly published the draft bill which can be viewed here. However it looks doubtful that the new cap can be implemented this winter.

Energy regulator Ofgem said October 11 that it would be unable to impose a cap on energy prices without new primary legislation but said that it would work with the government on the basis of whatever new law was proposed.

BEIS said that the cap would apply to households in England, Wales and Scotland on Standard Variable Tariffs (SVT) and other default tariffs. The bill would require energy regulator Ofgem to consult and impose the cap as soon as is practical once the legislation has been passed. The UK's Northern Ireland has its own devolved government and independent energy regulator and is not covered by this bill.

"It will be an absolute cap and, in setting it, Ofgem must have regard to the need to: protect customers, create incentives for suppliers to improve efficiency, enable effective competition for domestic supply contracts, maintain incentives for customers to switch and ensure efficient suppliers are able to finance their activities. The cap would be a temporary measure, having effect initially until the end of 2020. The need for it would be kept under review, and extensions could be made, on the advice of Ofgem, up to the end of 2023 at the latest," said BEIS.

At this stage, it is unclear how high that "absolute cap" will be -- too high and it may be of no real help to consumers on SVTs, too low and it could hurt energy suppliers. It is widely recognised that the SVT structure exists so that energy companies can offer low prices to woo new customers.

UK prime minister and Conservative Party leader Theresa May said on October 5 in her speech to the annual party conference that customers on SVT would be protected. The idea of capping bills was first mooted by Ed Miliband when he led the Labour Party in opposition; it was described as economically illiterate by the Conservatives and others, as the market was considered to be the best way to keep prices down. An enquiry by the Competition and Markets Authority found no evidence of cartel behaviour between the major six utilities in its investigation, which concluded last year.

But it now looks doubtful whether the new cap can be imposed this winter. Speaking October 11, opposition energy spokesperson Rebecca Long-Bailey, of the Labour party, said: "The government needs to hurry up and get on with it if customers are to feel the benefit this winter. It is now mid-October and we are yet to have sight of the legislation, despite Labour’s persistent calls for the Government to take action.

Mark Smedley