Prime Minister Theresa May has announced plans to tackle rip-off energy bills with an energy price cap. But will such a cap be enough to help you?
During her speech to Conservative Party Conference, Theresa May announced plans for an energy price cap. The Prime Minister said:
‘The energy market punishes loyalty with higher prices, and the most loyal customers are often those with lower incomes, the elderly, people with lower qualifications and people who rent their homes’
And announced that a draft Bill will be published next week that would give Ofgem powers to impose a cap on all standard variable tariffs.
Energy price cap
The move puts an end to months of buck-passing between the government and Ofgem about how to tackle soaring household energy bills. And it looks like it could finally deliver on the government’s pledges made during the General Election.
There are millions of hard-pressed energy customers still suffering due to a lack of competition in the energy market. So any intervention that brings down energy bills will be welcome.
That said, in bringing forward this legislation, the government must ensure that any cap doesn’t result in higher bills overall, undermine improvements in service or bring much-needed innovation to a halt.
To ensure that any intervention that’s made by the government is actually a good outcome for bill payers, we believe that it should pass five key tests.
1. It must not cause longer-term price increases
If bill payers see price reductions overnight, but energy providers offset initial reductions with price increases over the long-term, the cap won’t have worked.
2. It must not remove incentives for providers to improve their service
Consumers have routinely suffered from poor customer service from many suppliers and have faced particular issues with inaccurate bills and poor complaint handling.
3. It must not stifle innovation
The government and the regulator must ensure that the cap does not stop consumer-friendly innovation in the energy market. They must ensure that the smart meter roll-out continues to be advanced in the most cost-effective way possible.
4. It must lead to a truly competitive energy market
Consumers have suffered as a result of a lack of competition in the energy market with the competition authorities estimating that people are collectively overpaying by £1.2bn as a result.
5. It must have clear criteria for bringing any cap to an end
The long-term objective must be for a competitive energy market that delivers for consumers. This means that any price cap should be time-limited. The government and the regulator must set out proposals for the length of the cap, how they will monitor its success, and the criteria by which it will be removed.
Of course, the cap will not take effect this winter, which may be a disappointment to those who are already concerned about energy costs as we descend into the colder, darker months.
With a number of price hikes by a number of larger and smaller energy suppliers in recent months, energy prices are returning as a top financial concern for many. So the draft Bill must make the most of the opportunity to fix this broken market and deliver a fairer deal.
Now we await the publication of the draft Bill and the full details of the Prime Minister’s proposal.
Update: 11 October 2017
The energy regulator, Ofgem, will extend its current price cap for prepayment gas and electricity meter customers to cover an additional one million households this winter.
The plan will see energy bills cut by an average of £120 over the year for some of the UK’s most vulnerable households, according to the regulator.
The regulator has also said that it will begin consulting on extending the price cap for a further two million households for next winter, once the government’s price cap plans are confirmed. The Prime Minister announced last week that the government will prepare a draft bill to propose an energy price cap, this draft bill is expected tomorrow.
Our managing director of home and legal services, Alex Neill, said:
‘As temperatures dip, today’s announcement will be welcome news to some of the UK’s most vulnerable households. The implementation of a market-wide price cap is clearly going to take some time, so it’s right that the regulator is looking to more quickly protect the most vulnerable.
‘Energy companies must also do much more to engage their customers, helping them to switch to a better deal now. Only time will tell whether all of these interventions will really deliver better outcomes for consumers.’
We want to see a fairer energy market for all households. Every household, even those affected by the energy price cap, could get a better deal by switching. Our free Which? Switch service can help you compare gas and electricity prices and help you find the best deal for you.
Do you think a price cap will be the solution we need to fix the energy market? What else would you like the government to do?
Update: 12 October 2017
We’ve been campaigning for many years to highlight the broken energy market. Over 500,000 supporters supported our Fair Energy Prices campaign, urging energy companies and the regulator to do more to get customers off rip-off standard variable tariffs (SVTs).
So the news that the government has published a draft bill to introduce a price cap should be welcome. But it isn’t quite so straightforward.
Two-thirds of households in England, Scotland and Wales will become much better off overnight when the cap is introduced, giving relief to hard-pressed consumers. 14 million people on SVTs will save themselves hundreds of pounds a year.
But although the Draft Bill requires Ofgem, the energy regulator, to put the cap in place as soon as possible, consumers shouldn’t expect to benefit soon. The Draft Bill will have to go through pre-legislative scrutiny first before a bill goes through the normal legislative process and Ofgem consults on the measure. Then there will be another step of statutory consultation to change energy suppliers’ licensing conditions. It’s unlikely the cap will come into force until winter 2018/19, to remain in place until at least 2020.
Whilst a cap may sound like a positive move, we want the government to safeguard against any unintended consequences like higher prices, reduced competition in the market and poorer customer service. So it is promising that the Draft Bill outlines a temporary cap, and Ofgem will be tasked with making sure competition and consumer incentives to switch are preserved. But there is a long road to travel down before we know what the actual cap will look like.
Update: 13 February 2018
A report published by the Business, Energy and Industrial Strategy (BEIS) Committee has concluded that the government’s proposed energy price cap is necessary to address the UK’s broken energy market.
According to the Committee, the energy market has been dysfunctional for years. It highlighted that the regulator has failed to protect energy customers.
The report found that many energy suppliers are making substantial profits out of around 12 million ‘sticky’ customers who are on poor-value tariffs. The committee believes that an absolute price cap is the best way to tackle this overcharging for energy.
The introduction of a price cap should be a helping hand for millions who are paying over the odds for their energy. However, we’ve stressed that this price cap should not lead to any unintended consequences for consumers, such as poor customer service or higher prices overall.
While the Committee has called for the cap to be urgently introduced, it’s not expected to come into effect until next winter at the earliest. Our research found that you could save up to £305 per year by switching*, so if you think you could be overpaying for your energy then try Which? Switch to compare prices and see if you could get a better energy deal. Even once the price cap is in force, you will have to switch to get the best deals on the market
*A saving of £305 per year is possible by switching from the priciest Big Six standard tariff to the cheapest deal on the market. The figure is correct as of the 1 February 2018.