UK Price-Capping Back on Tory Agenda (Update)

(Updates with comment from Centrica at end)

Prime minister Theresa May told the annual party conference in Manchester October 4 that customers on the standard variable tariff (SVT) would be protected from hikes under a bill to cap prices, expected to be launched in the first half of October. There was no mention of this when the Conservative Party leader announced her legislative priorities for the coming year in the Queen's speech at the end of June; however, it was in the party manifesto on which she fought the election.

The SVT is typically the highest price a retailer has. It allows it to subsidise the low price offers it uses to woo new customers who, following the introductory period, are then moved on to the SVT themselves.

This practice does not go far enough for the energy workers' union GMB, which on October 5 called for the abolition of Great Britain's energy regulator Ofgem, with all its regulatory functions to be taken over by the government, along with the power to cap prices if deemed to be a necessary part of the forthcoming legislation.

Ofgem has not supported price caps in the case of SVTs, but has put in place lower rates for the most vulnerable domestic consumers: those with prepayment meters. With effect from April 1 this year companies may not charge above a specific level set periodically by Ofgem. The cap was one of the remedies introduced following the Competition and Markets Authority’s investigation into the energy supply market. 

The cap is, however, temporary and is due to expire at the end of 2020 when the smart meter rollout is expected to complete. It covers all domestic prepayment customers, except those with a fully interoperable smart meter.

GMB national secretary Justin Bowden said: “Ofgem should be abolished and all its regulatory functions taken over by the government itself, making its regulatory role subject to scrutiny and accountable to parliament with the powers to cap prices if deemed a necessary part of the forthcoming legislation. This would form the basis of an energy policy that took the real decisions needed to keep the lights on and ensure the decarbonisation of the sector, whilst guaranteeing the resources needed to generate jobs and to pay for the vital infrastructure needed to maintain our power networks.

"Any cap must differentiate between profiteering and these fundamental necessities, so government should also have powers to limit profits and where necessary, to finance and run power stations,” he said.

Ofgem publishes regular retail energy market updates where the extent of suppliers' profiteering or loss-making can be seen. It leaves customer prices to the market but regulates the profits of the natural monopolies in gas and power transmission and distribution, depending on how well they innovate and promote consumer choice.

Employers' lobby group, the CBI, also came out against the idea of price caps. Director-general Carolyn Fairbairn said May 4: “Affordable energy matters for everyone and particularly for the most vulnerable. However, today’s announcement is an example of state intervention that misses the mark. Market-wide price caps are not the best answer. Suppliers are already acting, providing support to those on pre-payment meters, and continued action to phase out standard variable tariffs would benefit a wide range of consumers, including those on the lowest incomes."

Dominant retailer suggests other approach

The CEO of Centrica, Iain Conn, said October 4 that the UK energy market "can and should be improved for the benefit of customers" and that "further structural change is required." However, price caps were not the right solution, he said: "There is clear evidence that where they have been tried, they have been bad for customers. They limit choice, reduce competition, and prices tend to cluster around the cap.

“The main problem with the market is the SVT. Rather than cap them, which will keep standard tariffs going, our position has been that they should come to an end. We believe a more effective and long-term solution would be for the regulator to end the SVT across the industry and to make some other structural changes. 

“Ofgem has been tasked by the government to provide advice on improving key aspects of the market and have been consulting widely. We have made extensive contributions to both government and to the regulator and look forward to hearing from Ofgem shortly on the results of their recent consultations," he said.   

William Powell