Suppliers may face a higher borrowing costs and lower profits as a result of the move to cap energy prices, according to the government’s own assessment.
The impact assessment of the Domestic Gas and Electricity (Tariff Cap) Bill, carried out by the government’s own regulatory policy committee, was published alongside the legislation yesterday.
It gives the legislation, which requires Ofgem to impose an absolute cap on standard variable and other default energy tariffs until 2020, a green light overall.
The committee says it has not included specific monetary estimates of cost and benefits in its impact assessment, which it says must wait until Ofgem has published its detailed proposals for how the cap will work.
But it warns that that profits may be hit if the cap leads to a reduction in suppliers’ revenues from customers on SVTs and other default tariffs, unless this drop is offset by efficiency improvements.
It says that large and mid-tier suppliers will suffer the biggest fall in profits because they have the biggest SVT customer base and their default deals tend to be amongst the most expensive on the market.
The tariff cap could also result in higher demands for returns from investors due to an increase in the perceived regulatory risk across the utility sector. The committee says this risk is ‘likely to be mitigated’ by Ofgem developing a clear and transparent methodology for setting the cap and the fact that it is set to be a temporary measure.
The committee judges that customers not currently on SVTs may lose out if suppliers raise their tariffs in order to recoup cash they have lost.
However the assessment says that households on default deals will benefit from lower bills, particularly those on low-incomes for whom energy bills are a higher proportion of household expenditure.
And it says engaged customers are expected to continue switching, as they should continue to benefit from lower prices due to the way the cap is being designed.
The committee says that evidence from the prepayment meter market, which has been subject to a cap since April last year, shows that it is still possible to obtain tariffs £50 below the level of the mandated limit on default deals.
There should be still competitive fixed tariffs for customers offered by challenger suppliers, some of which will have a relatively small number of customers on SVTs and therefore will not see their revenues impacted to the same extent as the bigger companies.
“It could increase the pool of switchers away from larger companies and potentially lead to market share growth for smaller suppliers,” says the assessment.
The cap is expected to have proportionately less impact on smaller supplier because “they have built their customer bases from engaged consumers by offering more competitive tariffs.”
But it finds that there will be reduced scope for suppliers to use higher revenues from poor value SVTs to undercut competitors in the non-standard tariff market.
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