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Broken energy market justifies energy price cap intervention

13 February 2018

The current energy market is broken and penalises customer loyalty say the Business, Energy and Industrial Strategy (BEIS) Committee in a report on the Government's energy price cap draft Bill.

12 million customers stuck on poor-value tariffs

The Committee concludes that the Big Six have brought the introduction of a price cap upon themselves by their raising of prices in 2017 and by failing to take effective action against the overcharging for years of their customers on default and standard variable tariffs (SVTs). 

The report finds that competition in the domestic energy market is not working effectively for 12 million customers stuck on poor-value tariffs, called standard variable and default tariffs. This market has become two-tiered, with some consumers paying up to £300 more than others each year.

Protect customers next winter

Rachel Reeves MP, Chair of the Business, Energy and Industrial Strategy (BEIS) Committee, said:

"The energy market is broken. Energy is an essential good and yet millions of customers are ripped off for staying loyal to their energy provider. An energy price cap is now necessary and the Government must act urgently to ensure it is in place to protect customers next winter.

The Big Six energy companies might whine and wail about the introduction of a price cap but they've been overcharging their customers on default and SVTs for years and their recent feeble efforts to move consumers off these tariffs has only served to highlight the need for this intervention."

Energy market dysfunctional for years

The BEIS Committee finds that too many energy suppliers rely on a business model where they target cheap acquisition deals at engaged customers who switch, whilst making substantial profits from 'sticky' customers on expensive variable tariffs who do not or rarely switch.

The Committee finds that the energy market has been dysfunctional for years, with the regulator - Ofgem - too slow and reluctant to use its powers to step in and protect the interests of customers, especially vulnerable customers. The Committee urges Ofgem to be faster and more proactive in using its extensive powers to protect consumers from overcharging in the future.

Absolute price cap

The Committee agrees that an absolute price cap – and not a relative price cap -  will be the most effective measure at delivering the Bill's key goals: improving fairness and reducing the overcharging of standard variable and default tariff customers. The Committee also concludes that suppliers do not need appeal rights to the Competition and Markets Authority for this Bill, finding that this could unnecessarily delay the successful implementation of the cap.

The report also addresses concerns raised by Ofgem that the price cap could be gamed by suppliers offering pricier ‘green' electricity tariffs via a loophole in the Bill. The Committee believes the Government should take these concerns seriously and amend the Bill accordingly. The exemption, which the Committee otherwise welcomes, should be extended to green gas tariffs.

The slim evidence that smart meters will have any substantial impact on customer switching rates leads the report to conclude that it would be unwise to rely solely on the smart meter rollout once the cap is lifted to maintain effective competition in the market.

Once the cap is lifted, the report recommends the Government and Ofgem should take any necessary measures to ensure that the elimination of overcharging remains in place in the long term and that suppliers are not able to go back to their overcharging and cross-subsidising practices. The report recommends that the Government provides details on its plans to protect vulnerable customers from overcharging when Ofgem's safeguard tariff and the Government's price cap are lifted. Engagement measures currently rolled out should also be maintained to keep encouraging customers to switch suppliers.

Ofgem and energy suppliers identified that a major obstacle to helping to protect vulnerable energy customers is the difficulty in identifying these customers due to insufficient data-sharing. The Committee welcomes the Government's plan for a consultation into data matching to identify vulnerable consumers. The Committee recommends the Government publish the result of the previous Cabinet Office consultation on this issue and act on Ofgem's recommendation to allow data sharing by amending the Digital Economy Act.

Further information

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