A legislative “sunset clause” stipulates the energy price cap will end in 2023, which means the incoming government will preside over its removal.
Yet part of Ofgem’s criteria for assessing whether market conditions are sufficient for its removal before 2023 is whether a well-functioning competitive process is in place and herein lies the problem.
As Alan Whitehead, Labour shadow minister for energy and climate change, has previously pointed out to Utility Week, what Ofgem may think is a resumption of a fair market may be influenced by how it perceives its own work.
Several amendments providing detail on how Ofgem can assess the market were proposed at committee level during the passage of the bill through parliament. All but one were rejected.
“Part of our aim of trying to put those amendments in at the time the legislation passed was to get some sort of objective handle on this.
“I think it demonstrates that actually we are in a pretty unsatisfactory position as far as how that procedure is going to work to bring the price cap to an end if that is what is wanted”, he said.
The law states that Ofgem will make an annual report on the competitiveness of the energy market which will be presented to the government, for the secretary of state to consider whether the market is competitive enough for the price cap being lifted before 2023.
This means that Ofgem will have to effectively mark its own homework as there is little in the price cap legislation to guide its decision.
A more satisfactory outcome would be to introduce a rigorous, independent review into the cap, meaning the decision is taken out of the regulator’s hands.
While the government introduced the price cap to protect vulnerable customers, much has been said of its effect on energy suppliers and in particular, the big six. The most notable example of which is Npower which is in the process of merging with fellow big six supplier Eon.
In its latest results, Npower’s parent company Innogy reported a rise in losses from its UK retail arm after 211,000 customers left the company over the three months to the end of September, leaving it with 3.64 million accounts.
The financial results for the first three quarters of 2019 show revenue from the supplier falling 4 per cent year-on-year to €4.86 billion (£4.14 billion).
Innogy blamed the poor performance on the cap on default tariffs.
Other big six suppliers have also cited the cap as being of concern, with Eon blaming recent job losses on the cap.
Recently Sara Vaughan, the group’s political and regulatory affairs director, said the energy retail market feels “broken”.
“I have fears about our ability to deliver the great change that we need to unless we see amendments to that market itself.
“We are operating under a price cap which (Ofgem chief executive) Dermot Nolan described as tough. It has been set with the expectation that companies will on average earn a margin of -1 per cent.
“A number of suppliers have been consistently pricing below cost. An average of one company per month crashed out of the market in 2018, leaving behind £200 million in unpaid bills which the rest of us had to pick up. Other players, even long-established ones are bowing out voluntarily because they just can’t see a profitable future.”
But there are some industry voices who would be more at ease with a permanent cap. Greg Jackson, chief executive of challenger brand Octopus Energy, recently wrote that a permanent price cap will only continue to “stimulate competition and reduce the need for regulatory ‘meddling’”.
Jackson points to record high rates of switching under the cap which he attributes to increased consumer confidence in engagement.
The necessary next step of the price cap process puts Ofgem in a very difficult position. An independent body would help ensure unbiassed decisions relating to the future of the cap are made. The conclusions will have a profound effect on the energy retail market for many years and it is vital that all stakeholders have faith in the process.