With Ofgem having announced the proposed level of the default tariff price control coming into force this winter, suppliers now have an indication of what they have to deal with in the post-cap world.
However there remain huge challenges and uncertainties in complying with a new price control for 11 million households
We now have over 70 suppliers in the domestic retail market who will be examining the details of the cap to see how it will affect them. No two companies, or their customer bases and respective costs to serve, are the same and so each will be affected differently but many will have to look hard at how they adjust, especially during a period of sustained high wholesale costs. As they consider their response to Ofgem’s proposals, suppliers will be looking closely at issues like the approach to wholesale costs, the allocation of smart meter costs and the ‘headroom’ intended to ensure effective competition operates under the cap.
Such adjustments and actions are not without consequences for companies, and indeed the sector as a whole, and the challenge for suppliers will be making their operations as efficient as possible without affecting the quality of their service or their ability to invest in innovation and improvement. All of this at a time when a rapidly changing market with more suppliers and more switching means tough competition to win and retain customers, not to mention other uncertainties like Brexit and costs outside of suppliers control – and indeed the possible impact of the cap on switching levels with Ofgem’s own impact assessment warning of a potential reduction resulting from the cap.
One beneficial side effect of the cap process might be some greater transparency around the costs that suppliers face – nearly 80 per cent of which are out of their direct control. That wouldn’t in itself be a bad thing although it’s likely to show the continuing effect of rising wholesale costs which have been the major factor in price rises right across the market this year.
The cap will have to accommodate such rises so we need to keep focussing on the other ways we can keep costs down for consumers. There is an ever-growing appreciation that a comprehensive energy efficiency programme will be by far the most effective way of keeping bills down for customers over the long term. Smart meters offer the opportunity to keep bills down not just by giving consumers greater awareness and control of their usage but through opening the door to greater flexibility with products and tariffs. And looking upstream, we need to ensure that the cheapest sources of the power that customers use are not excluded and deliver the smart grid in order to ensure future investment across the value chain is as cost effective as possible.
Most importantly, irrespective of the cap, the industry must continue to focus relentlessly on improving the service provided to all customers. Despite the progress in recent times, there is still much work needed to engage better with customers and help ensure that everyone, no matter what their situation, has access to a fair deal and are able to take advantage of technological advances to enhance the services we provide.
Central to the goal of a universally functioning and socially responsible market is that we go further in our ongoing efforts to support and help vulnerable customers – those for whom engaging in the market and benefitting from all the innovation and advances that could be on offer provides more of a challenge. That’s why we launched the independent Commission on Customers in Vulnerable Circumstances earlier this year.
The post price cap world will provide both a real challenge and an opportunity for suppliers – but the goal remains the same – to keeping striving for an energy market that works well for customers, no matter what their circumstances are.