What’s the price of the energy price cap?
So it’s almost, finally, nearly here. After what feels like years of debate and discussion, Ofgem has announced the level that the energy price cap will be set at – and unless there are any last minute legal challenges, it’ll be in place at the end of the year.
I’m not against the price cap – but it comes with risks. And these have been revealed once again as energy companies, consumer groups, switching sites, journalists and politicians all had their say on Ofgem’s announcement.
So what’s the price of an energy price cap? Here are some of the risks as I see them:
1. Is it set at the right level? As Emily Gosden at The Times said, analysts believed a tough cap would have been set at £1,130. And Ofgem have delivered on that with a cap set at £1,136.
Energy UK have immediately questioned whether such a tight cap will have an impact on much needed investment. Well, they would, wouldn’t they. But none of us will be impressed long term if it has an impact on new generation or further delaying the roll out of smart. Maybe investment won’t be affected if energy companies simply become more efficient or profit levels drop, but we’ll see ….
2. What happens when Ofgem revise the level? Again as Emily points out, the regulators first review of the price cap level in February 2019 (with a potential £100 hike) could come in the midst of a cold snap. Cue media and consumer outrage as the newspapers scream: “I thought the price cap was meant to cut our bills!” Worst case scenario is that this leads to another debate about how we cut all the green crap on our bills. We’ve been there before, please God don’t let us return to that debate again.
3. What about standard credit customers? Another issue raised by both Emily and Citizen Advice’s energy guru, Rich Hall, is the difference between the cap for direct debit customers and for those who pay by standard credit. As Rich points out, Ofgem initially suggested that the cost difference could be £22 – yet the proposed cap for standard credit customers is in fact £83 more expensive than direct debit. Whether or not this really reflects the cost of serving non-direct debit customers, it is still likely to raise a debate about whether this is fair.
Back in 2014, Conservative MP Rob Halfon was making merry hell for the energy industry by pressing for action on the penalty faced by people who didn’t pay by direct debit. And while Mr Halfon has celebrated the price cap news, he and others may soon be complaining that some of their constituents are not getting the protection that direct debit customers have secured.
4. What about vulnerable consumers? As Adam Scorer at National Energy Action points out, the price cap is a “fair markets” and not a “fuel poverty” solution. And the big immediate issue is whether it’s right for people who were already getting their prices capped as “vulnerable consumers” to now get rolled into this broader safeguard tariff. And as Adam and many others have said, the real fix for people in fuel poverty is energy efficiency – which I’ll come back to later.
5. What impact will it have on switching? The price comparison websites – those wonderful consumer champions, who only have our best interests at heart – have of course warned about the impact on switching levels. And Ofgem agree that they’ve got a point, suggesting that switching could drop 30% due to the cap.
Martin Lewis, Which? and others have continued to encourage consumers to ignore the cap and get onto a truly competitive deal. But there’s obviously a risk that they’re whistling in the wind, when the public hear messages that they’re now saving £75 of £100. We’ve come a long way in recent years, with good new companies like Octopus and Ovo stealing customers from the incumbents, so let’s hope the cap doesn’t damage that progress.
6. What does it mean for customer service? My old employer, Which?, has also raised the alarm about customer service levels as a result of the cap. And if customers are less inclined to leave their supplier – and if efficiency savings mean less people answering consumers calls or handling their complaints, then maybe we could see the low levels of customer satisfaction in the sector fall even lower.
7. And finally what impact will it have on energy policy in the long term? Earlier this week, I was at a great event organised by Field Consulting on disruption in the energy sector. Almost everyone agreed that these are exciting times when you can start to imagine consumers getting better, more tailored deals from their suppliers – perhaps bundled with other services or home improvements.
The biggest risk with the energy price cap is that it could damage any consumer friendly moves in this direction. The Government and the regulator will have an incentive to say “job done” and as a result, other much needed reforms will be delayed.
This is particularly the case for the energy efficiency agenda which has not just stalled but taken a step backwards after the progress of the Coalition Government years. Yes, the Green Deal was a debacle but at least we were trying to make our homes warmer, cheaper to run and less damaging to the environment.
The danger with the price cap is that unless organisations seize the narrative and press the Government and regulator and industry to use this moment to deliver reforms that really overhaul the energy system, then we could come to the end of the price cap period and things could be worse.
Less investment, poorer customer service, less competition.
And people still whinging about their energy bills ever winter.
And I think we’re all fed up with that.