15 November 2017


Energy price caps – a recap, and what to expect from the draft bill

Following the announcement by Theresa May that she would introduce an energy price cap, there have been several developments, including the launch of the draft price cap bill, and the first stages of pre-legislative scrutiny. 

Energy price caps – a recap, and what to expect from the draft bill

What’s the context?

The energy market has undergone a series of assessments and investigations, which have followed periods of negative rhetoric. In 2014, Ed Davey, then Energy Secretary, asked Ofgem and the Competition and Markets Authority (CMA) to complete the first assessment, which resulted in the market being referred to the CMA on the grounds there were some features of the market that could potentially lead to distortions of competition. 

After the two-year investigation into the market, concluded in 2016, it was found that both regulation and low customer engagement were impacting competition in the market. The CMA put forward several measures which sought to encourage consumers to become more engaged in the market, thereby getting the best deals available for their energy use. It also put forward a price cap for customers on pre-payment meters. Energy companies and the regulator Ofgem have been working to introduce these measures. 

Following this investigation, the Prime Minister announced last month that her government would create new legislation that would allow Ofgem to introduce a price cap for a much wider group of customers.

What’s in the bill? 
The draft bill has now been released and is undergoing pre-legislative scrutiny. The bill calls for a cap to be set on standard variable tariffs (SVTs) and default rates, but exempts those where consumers have chosen a ‘greener’ tariff – accounted for within the supplier license. This cap would not apply to those who already benefit from the cap on prepayment meters, a measure which was recently extended to a further 1 million customers. 

The cap would be set by Ofgem at a level that would account for the need to protect consumers, create incentives for improved efficiency, and enable effective competition. It would also need to be set at a level that maintains incentives for switching, but also ensures that suppliers who are operating efficiently are able to finance their activities. 

What next?

Timelines are currently unclear; Greg Clark, Secretary of State for Business, Energy and Industrial Strategy has currently not confirmed the legislative slot that will allow the finalised Bill to make its way through parliament. Additionally, in the recent BEIS Select Committee meeting, the Secretary of State was unable to commit to the cap being introduced by Winter 2018-19. However, once introduced, the cap would then run through to 2020, with the option to review on a yearly basis through to 2023, should Ofgem deem this necessary.

What is business doing?

Whilst the Draft Bill is under scrutiny, business continues to work closely with Ofgem to introduce the remedies as set out in the original CMA investigation, but also to identify where more can be done to support and protect consumers. This includes most recently extending the pre-payment meter cap to a further one million consumers, and the recent consultation by Ofgem to end the automatic roll-over onto SVTs. Beyond this, some companies have committed to phasing out SVTs, whilst others continue to prompt consumers to switching, advertising their best deals, and innovating to deliver the best products for all consumers. 

For more information on our work in this area, please contact Hannah.Richmond@cbi.org.uk