The government has admitted that its proposed energy price cap may result in fewer cut price tariffs and less competition.
In its impact assessment of the Draft Domestic Gas and Electricity (Tariff Cap) Bill, which was submitted to the BEIS (business, energy and industrial strategy) select committee today (11 Dec), the government said the mooted cap on standard variable tariffs (SVTs) could inhibit competition because customers will have less incentive to switch suppliers in order to save money.
“Customers may choose not to engage if the gains from switching are decreased, and/or if they perceive that they are being protected by the government and hence on a fair tariff,” said the assessment, which has been submitted to the committee as part of its pre-legislative scrutiny of the draft bill.
It also said companies will have less scope to use higher revenues from poor value SVTs to undercut rivals in the more competitive non-standard tariff section of the supply market.
Some suppliers, especially those with large numbers of customers on SVTs may seek to raise the prices of their fixed tariffs in order to compensate for reduced revenues from customers on default products.
The assessment, which was drawn up by BEIS, also said businesses may face higher energy bills as suppliers seek to recoup reduced revenues from SVTs on domestic customers.
However customers will still be able to secure bargain tariffs from challenger suppliers that are less reliant on SVT revenues.
Conversely, the big six energy suppliers, which have a larger share of customers on SVTs than their smaller competitors, will see a bigger impact on their revenues from the potential reforms.
Lower income and less engaged customers should see an increase in household incomes thanks to the cap, according to the assessment.
However it did not include an estimated figure for costs and benefits for customers, which it said would depend on the level of the cap set by Ofgem
In developing the detailed methodology for setting the level of a cap, BEIS said the energy regulator will be required to have regard for the need for continued competition and maintaining incentives to switch.
The assessment said that price comparison websites would also suffer a negative impact as a result of the smaller pool of customers switching suppliers.