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A fool or a genius – Critics respond to Mr Davey’s plans

Industry and consumer groups respond to Ed Davey's announcement about restructuring the energy market.

disagreeEarlier this week, Davey revealed that energy companies may soon be limited to having just four “core tariffs” per fuel, which would have to include one standard variable rate and one fixed-term fixed price tariff.

According to the energy secretary, this would ensure that the two tariffs are not only clear and simple, but easy to compare – something the government deems is essential, considering those two types of tariff apply to 85% of consumers.

Under the new measures, energy suppliers would be able to determine the remaining two tariff categories, but will be required to offer a single price for each of the four tariffs and also ensure that customers who are on pre-existing deals that are more expensive are switched to cheaper rates.

“For too long people have been stuck on the wrong type of energy tariff, paying more than they need to. Our new proposals will make things much clearer and easier to understand, so that bill payers can get the best deal and feel the benefit in their pockets,” Mr Davey said.

Keeping promises

The move appears to be following through with prime minister David Cameron’s announcement last month that energy suppliers will be forced to offer their cheapest tariffs to customers.

The PM’s comments were regarded as premature by some and widely criticised, with commentators claiming that such legislation could simply lead to suppliers raising their prices across all tariffs, so the lowest rates are not necessarily cheap.

After Mr Davey’s announcement, the same criticisms were directed at the government, with some claiming that changes could stifle competition and even mean that some of the cheapest tariffs disappear altogether.

According to Corin Taylor, senior economic adviser at the Institute of Directors, the proposals “miss the point” as far as reducing energy bills is concerned: “Clumsy regulation restricting choice would simply allow energy companies to increase their lowest tariff, ensuring a higher minimum price for consumers.”

His comments were backed up by John Musk, energy analyst at RBC Capital Markets, who said that little will change as far as companies’ bottom lines are concerned: “Suppliers will still target the same overall margins in the future and thus will compensate for those customers who switched to cheaper deals by raising the overall level of tariffs.”

Vigilance required

Consumer groups have expressed concern about whether the move is in the best interests of customers, despite the Department of Energy and Climate Change’s assurance that it is.

Angela Knight, chief executive of the trade body Energy UK, said industry and the public “must be alert” to any signs that the changes put in place are detracting from interaction and innovation in the market.

Additionally, Adam Scorer, director of policy at Consumer Focus, said there is a danger of unintended repercussions, as well as a general “levelling up” of prices.

The energy secretary appears to have anticipated a backlash, telling an energy and climate change committee on Tuesday that he is aware of the debate in the House of Commons surrounding the Energy Bill and the consequences of any actions proposed by it.

He spoke of a “grand bargain” between the Conservatives and the Liberal Democrats but also conceded that talks between the two parties had so far been “challenging” – something illustrated by the crisis meeting between Mr Davey, the prime minister, energy minister John Hayes and chancellor George Osborne last month.

According to the energy secretary, any new polices are unlikely to be favoured by all, but the key is to ensure the majority are happy – both within the energy industry and also in parliament. “Not everyone will gain out of this. I’m not suggesting everyone will,” he added.

Unlikely to change

These comments were jumped upon by shadow energy and climate change secretary Caroline Flint, a major sceptic of the Energy Bill, who said that households are unlikely to get a good deal under the changes, regardless of any promises made by the coalition.

She highlighted that, since Mr Cameron vowed to force the energy companies to put all customers on the cheapest tariff, “millions of families” have seen their energy bills increase. Ms Flint was alluding to the price increase implemented by the Big Six suppliers over the last month, with SSE raising its fuel prices by 9% from October 15th and British Gas boosting gas and electricity bills by 6% on the 16th of this month.

Furthermore, Npower will raise gas and electricity prices by 8.8% and 9.1% respectively on November 26th, with Scottish Power and EDF both set to increase bills next month, leaving E.ON as the only major supplier yet to raise prices in the second half of this year.

With the latter company likely to hike bills in January when its price freeze comes to an end, Ms Flint said that more needs to be done than the government is currently planning.

“The cheapest deal in an uncompetitive market will still not be a good deal,” she explained.

“Unless David Cameron stands up to vested interests in the energy market and creates a tough new watchdog with powers to force energy companies to pass on price cuts, his warm words will be cold comfort to people worried about paying their fuel bill this winter.”

Mr Davey’s proposals are unlikely to be implemented until 2014, though the government is set to consult with industry representatives in January next year, with a view to every UK consumer being placed on the lowest possible tariff by the following summer.

Until then, the key question on everyone’s lips will be just how cheap those tariffs are.