With all eyes on the impending energy price cap, Ofgem’s chief executive Dermot Nolan was placed in the hot seat last week for a grilling by the Business, Energy and Industrial Strategy (BEIS) Committee – who knocked him down as being “incredibly passive” and a “bystander”.
Following this session, one thing is clear. The government believes Ofgem has failed in its duty to protect electricity and gas consumers. But the question is: does Ofgem believe the government has gone too far in seeking to redress the balance?
The draft Domestic Gas and Electricity (Tariff Cap) Bill is currently under scrutiny, with reports suggesting that a price cap on standard variable and default domestic gas and electricity tariffs could be in place as early as winter this year. With a price cap for gas and electricity prepayment meters having been implemented in April last year, there are some valuable lessons that the government should take note of from the trends and issues that have arisen from this policy.
Race to the middle
By Ofgem’s admission, there has been a convergence in energy prices towards the price cap following the imposition of the cap on prepayment meters. Evidence suggests that the cap has disincentivised suppliers from actively promoting savings, with Ofgem’s state of the energy market 2017 report finding that a number of suppliers that had previously offered tariffs below the cap actually increased their prices, bringing them closer to the cap. Additionally, Ofgem data indicates that since the implementation of the price cap, prices have effectively remained static.
Reduced number of switches
It’s widely recognised that more needs to be done to make sure customers are getting the best deal they can. But following the imposition of the price cap on prepayment meters, the number of customers switching suppliers actually fell. Mr Nolan argued that whilst the number of switches had certainly fallen, they hadn’t “collapsed”. However, this demonstrates that as prices converge at or towards a cap, there is even less incentive for customers, many of whom are already passive, to change suppliers.
Lack of engagement
In giving his evidence to the BEIS Committee last week, Mr Nolan made it clear that Ofgem is not convinced that a price cap will improve competitiveness in the market. He pointed out that, “effective competition in the long run is better than a regulated market,” and that continued increases in smart metering and technological advancements must be carried out in conjunction with any cap to create a more competitive environment. The serious risk is that the price cap remains in place for far longer than the Bill anticipates, causing significant harm to the market and ultimately the consumers that Ofgem is charged with protecting.
Mr Nolan was instructed by the Committee to “act with more urgency”. But in its own urgency to act, the government has failed to learn some key lessons from its cap on prepayment meters. Whilst a cap may be necessary in some form to protect the most vulnerable of consumers, the government must acknowledge the significant risk of damage to competition if a cap is applied to the wider market.