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The government's plan for an energy price cap

The government's plan for an energy price cap

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."

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