The long-awaited energy price cap came into effect on 1 January, but many argue that it shouldn’t bother efficient energy companies and may bolster market confidence.

For most of us, January is an anxious time for scanning credit card statements as the consequences of seasonal spending come home to roost.

However households have been offered one source of relief in the form of the price cap on energy standard variable tariffs (SVTs), which came into force on New Year’s Day.

Under the cap, the typical SVT dual fuel customer will pay no more than £1,137 per year. The exact sums paid by the approximately 11 million customers who are on SVTs or other default tariffs will continue to vary, though, because actual bills will continue to reflect the amount of gas and electricity used.

However, Ofgem reckons that the average saving will work out at around £75 for households over the course of a year.

The ire driving the introduction of the price cap was clearly targeted at the big six with their substantial back books of SVT customers inherited from the days of regional supply monopolies.

However, the finances of these largest energy companies will remain “relatively robust”, reckons Nigel Hawkins, utilities sector analyst at Hardman & Co and a business correspondent for Utility Week.

“If you are one of the big six you have other fish to fry,” he says, explaining that the large and diversified nature of these companies means they often have more pressing issues to deal with.

Greg Jackson, chief executive of challenger supplier Octopus, is sceptical about SSE’s claim that the price cap was a key factor behind the abandonment of its mooted tie-up with Npower.

“The price cap was announced many months before the price cap went ahead, so one would imagine their advisory teams were aware of the price cap long before.”

Efficient suppliers are able to make money by setting tariffs at levels “way below” the price cap, he says. “It’s been set at a level that is entirely deliverable by efficient energy companies.”

He continues: “While in the short run a lot of inefficient energy companies will be complaining about the effects of the price cap, the reality is that if we have an industry less focused on exploiting disengaged customers, we will have an industry that is more trusted.

“There is no need for a company to have prices as high as the cap if they are efficient. It encourages companies to finally get efficient rather than overcharge their customers.” Jackson estimates that around £1,000 is the cut-off point at which suppliers should be able to offer a tariff without losing money.

Smaller companies will be under pressure to axe their most cut-price deals, which many have used to lure customers away from more established competitors, says Hawkins.

It would make sense for such suppliers to allow prices to drift up nearer to the cap level and use their existing customer bases to boost balance sheets. He says: “I would get a bit more market share if I can and see how it pans out over the next year.”

And the cheapest deals are already disappearing. The number of those lower than £1,000 a year plummeted by 90 per cent during the course of 2017, according to Which? The consumer group published figures in the run-up to the price cap’s introduction last week that showed just eight of these cheapest energy deals were still on offer.

Alex Neill, Which? managing director of home products and services, argues that the drying up of these cheapest deals reinforces the need for a more fundamental reform of the energy supply market than the cap.

But Hawkins believes that rising wholesale energy prices have probably been a more important factor than the price cap in the falling number of bargain basement tariffs on offer.

Robert Buckley, head of retail at consultancy Cornwall Insight, agrees. “Those deals would have gone up anyway,” he says.

However, Jackson strikes a positive note about the prospects for switching, observing that in the few days since the cap came into force, its rate of customer acquisition has held up.

The last set of Energy UK switching statistics, published in November, showed engagement still on the rise.

And the next set of figures, which will cover the month of December when levels of switching are historically low because of Christmas, will offer few pointers, believes Buckley.

Jackson argues that the publicity surrounding the cap’s introduction can only fuel SVT customers’ appetite for getting better value for money energy deals, comparing them to workers earning the minimum wage.

“They may know they are not being exploited but they also know they can do a lot better. We will make sure that people know at the level of the price cap that they can do a lot better.

“Without customers switching we wouldn’t have a business and yet almost every reputable energy challenger supports the price cap because we know the use of dodgy ‘tease and squeeze’ deals hides which companies are efficient and which are not

“The price cap restores some sanity to the energy market. They [customers] finally know they are not going to get ripped off: they can engage safely in the market and can see which companies are actually efficient and which one previously relied on dodgy tactics to win new customers.”

However, the cash relief for customers could be relatively short-lived with an update of the level of the cap due in February. This figure, which will then fix the cap for the six months beginning in April, will be informed by the level of wholesale market prices between August and January.

Cornwall’s SVT cap tracker, which estimates the level that Ofgem will set based on the regulator’s own stated methodology, spat out its latest forecast in November.

This calculation, which included October’s spike in wholesale prices, indicated that the level of the cap could increase by up to 10 per cent when it is next updated in February, says Buckley.

Prices have subsequently fallen back again, suggesting that the increase may not be as substantial. Nevertheless, for energy customers, it may not take long for the New Year price cap cheer to rub off.

What to read next