Government plan to cap SVTs takes shape as draft legislation set to be published

Greg Clark has cast doubt on Ofgem’s fear that it would face a legal challenge from energy suppliers if it used existing powers to cap energy bills.

Speaking on Radio 4’s Today programme, the business secretary reiterated the government’s plans to publish draft legislation to cap standard variable tariffs (SVTs), which will be published next week.

Ofgem said in August that it would publish proposals for a safeguard cap to protect vulnerable customers – such as those eligible for a warm homes discount – but has been reluctant to extend this across the market. 

Clark said: “Their concern is that if they exercise their powers without legislation they would suffer appeals from energy companies and that it would be knocked down in legal battles. My view is that I would be surprised if energy companies wanted to battle their way through the courts.”

And he repeated his view, reported by Utility Week earlier this week, that customers would receive much more rapid relief from excessive bills if Ofgem used its existing powers to introduce a broader cap. 

According to a briefing note, issued yesterday by Conservative HQ following prime minister Theresa May’s party conference speech, the draft bill will give the regulator beefed up but temporary powers.

The note said Ofgem will be responsible for setting the level of the cap within the framework of a competitive market and arms-length regulation, which underpins the existing energy supply system.

The cap should deliver savings for customers on bad deals while providing them with enough headroom to shop around. The measure is intended to be temporary until smart meters have been rolled out.

In her speech, May said that the energy market “punishes loyalty with higher prices”.

She continued: “This government will publish a draft bill to put a price cap on energy bills. Meeting our manifesto promise. And bringing an end to rip-off energy prices once and for all.”

Ian Conn, chief executive of Centrica, urged the government to delay the publication of the bill.

“There is a much better way of solving this market in the long run,” he said, arguing that overseas experience showed price caps limited choice and reduced suppliers’ scope to offer “really cheap deals”.

As an example, he said that deals for customers on pre-payment meters, which have been capped since April this year, only varied by a maximum of £2 across the market.

Conn said that a better solution would be to change the regulations stipulating that customers can be automatically defaulted onto SVTs at the end of fixed term contracts.

Jon Davies, founder of Switching Energy, said that a cross-market price cap would give consumers fewer incentives to seek better deals from suppliers

“The proposed cap will serve to perpetuate the old favourite of better prices for new customers versus a lack of reward for loyal ones, with those who choose to remain on a supplier’s SVT indirectly subsidising those who choose to constantly switch.

“Once again, energy switching is being misrepresented for political gain, rather than being debated in a constructive and non-partisan manner. There is an illusion that the government of the day should intervene to fix the energy market. While consumer choice and engagement need to be addressed, this won’t be driven by the government.”

Alex Neill, managing director of home products and services for Which?, gave the proposed bill a guarded welcome.

“This legislation must not result in higher bills overall, undermine improvements in service or bring much needed innovation to a halt,” he said.

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