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The government’s plan for an energy price cap

What we know so far, and how it could affect energy bills

Buried within Theresa May’s eventful Conservative Party Conference speech, was a revived plan to introduce a cap on standard variable tariffs (SVTs).

Following the announcement, the government published a draft bill on 12th October; if and when this bill becomes law, it would require the energy regulator (Ofgem) to enforce a flat rate cap (also referred to as an “absolute” cap) across the price of all suppliers’ SVTs.

SVTs currently act as a supplier’s default tariff, and are often hundreds of pounds more expensive than the cheapest fixed deals on the energy market.

Fixed rate energy deals currently provide the alternative to SVTs: for a fixed amount of time, consumers can benefit from much cheaper rates on one of these deals. When their fixed deal ends, they can pick another fixed deal — but if they don’t make a choice they will roll back onto the more expensive SVT again.

Many customers remain loyal to their suppliers and don’t change energy tariff despite the savings on offer. Even switching to a cheaper fixed deal with your existing supplier will save you some money compared to staying on an SVT.

The proposed flat rate cap would limit the cost of the average SVT bill — taking into consideration unit rates, standing charges and future wholesale costs. The aim would be to give the 12million households on one of these default tariffs an upper cap that suppliers could not go over, although at this stage no details on what the level of the cap might be have been given.

When will the cap be in place?

The finer details of an energy price cap are still to be announced and it could be some time before the bill is introduced to and approved by Parliament. Ofgem will have to consult with suppliers themselves on how the cap limit will be set.

The regulator has confirmed however, that such a cap will not be in place for this winter; as the length of the entire process is unknown, there is further concern that the cap might not be in place for next winter (2018/19) either.

In the meantime, Ofgem has announced plans to extend the current prepayment price cap to a further one million vulnerable households (who receive a benefit called the “Warm Home Discount”) for part of this winter. This would save an average of saving £120 a year, but will not take effect until February.

Will it work?

In theory a flat rate cap sounds like it would help energy customers: the Government sets the upper limit of what energy companies are able to charge, and no one has to pay more than that. Problem solved, right?

Unfortunately it’s not quite that simple.

One big concern is that the cheaper fixed deals that are currently available could be withdrawn from the market: energy suppliers may start setting their prices close to the level of the cap, in effect charging everyone the maximum amount they can.

Concerns over creating a false sense of security

Richard Neudegg, uSwitch’s Head of Regulation worries the cap could have detrimental effects instead of helping consumers:

“the cap could condemn millions of households to higher gas and electricity bills by lulling them into a false sense of security. Right now consumers can save an average of £357 in just minutes by switching —  far more and far quicker than any cap will offer. But this won’t happen if they are told to stay where they are and not take advantage of the cheaper tariffs available.  

“The Government cannot have it both ways. This intervention will remove the most effective weapon in keeping pricesdown – competition. Instead they should focus their efforts on widening access to the Warm Home Discount for vulnerable households.  

“Figures released by Energy UK show just how powerful competition is when it comes to helping consumers. Over 550,000 electricity customers chose a new supplier last month and were able to take advantage of the huge range of tariffs available and find the best deal. The big risk with heavy handed price regulation is that it will remove the pressure on suppliers to continually innovate, offer competitive deals and improve customer service.”

Poll

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  • Amazing the howls of negativity from the likes of Uswitch , and for example, Flipper…, on this subject. Mainly because the ramifications of a price cap, or perhaps, under a Labour government, nationalisatiion of the energy companies……., the result would be that all these outfits that make lots of money from commission, when people switch…, basically become redundant. Who needs them.

    All this switching business has basically become a farce. Switch from one to another supplier…, you know that sooner rather than later, your new outfit will push up their prices. Customers are constantly chasing their tails. I’m fed up with this.

    • Robert Lindsay

      You summed it up perfectly.I too have switched suppliers in order to secure a better deal only to be met with the usual administrative errors and confusion.I have now stopped switching because of all the hassle.It really is a total FARCE!!

  • Jim Shanks

    My house is ‘all electric’. I use about 15000 units of power each year for heating and general domestic use. I have used u Switch for the past 3 years to help find a suitable fixed tariff. I have used E.ON and EDF without any problems and will stick with EDF for the coming year. The only farce I ever encountered was with my original supplier of many years, SCOTTISH POWER.

    I have already worked out that the wider application of a price cap will lead to higher prices for everyone else.
    Jim Shanks.

    • Alan Brett

      I agree. The suppliers will want to preserve their margins and the only way they will do this is to increase the price of fixed term deals.The onus is on the customer to switch after careful consideration.

    • Bob S.

      I switched from EDF to Octopus Energy, saving about £17/month. By August, my £60/month (dual fuel) has put me £193 in front to cover winter.

  • Freddie Moran

    Switching becomes easier by the year, this year all of 5 minutes, dd payments transferred automatically, closing reading and a refund within 4 weeks. Also if signed up to uSwitch, or the likes, the better deals are automatically flagged up to you.
    A lot easier than haggling car, house, travel insurance every year! People need to get off their backsides when it comes to energy, just like they do for phones, petrol, flights, etc.

  • Bob

    I agree with the previous guys who are prepared to shop around. With the help of uSwitch and other tools that are available to us it’s no big haste to find a better deal and save some money. Too many people just don’t want the bother, yet they complain about how much profit the energy companies are making. If your charges go up then move. Competition is not a bad thing so use it.

    • Reg Montague

      We are about to have a Smart Meter fitted. I hear that there is no universal meter used and that each company has it’s own design. If that is correct, it sounds as if the meters will have to be ripped out each time we switch Does anyone know the technicalities here? Fortunately, we don’t switch very often as we are very happy with First Utility AT THE MOMENT

  • Reg Hammond

    Well there IS a solution to all the hassle of switching – its called ‘SmartSwitch’ and it does the switching for you automatically – for free – and forever! You never have to use a price comparison website OR waste your time decoding your bills to find out what you’ve used in order to make an accurate comparison. ‘SmartSwitch’ does all of this slog for you … its not magic – its logic!

  • M Hicken

    Why not make the suppliers have to state on all their bills – in a highlighted large box, which of their other tarifs would be cheaper for each individual customer’s usage during the previous year, since they have access to customers’ previous bills, stating how much cheaper these tariffs would be and with a telephone number for customers to contact them to switch?

  • Mia Clark

    What about all the people who can’t switch? Vulnerable OAPs who have never used a pc? Poorer families who can’t afford a pc? People who pay on a meter? There must be a fairer way of doing things.

  • Ian Fittes

    Stay with British Gas on their standard tariff or you might not know where you are at. Apply to all purchases.

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