Domestic Gas and Electricity (Tariff Cap) Bill

Written evidence submitted by Energy UK (DGEB02)

Energy UK is the trade association for the GB energy industry with a membership of over 100 suppliers, generators, and stakeholders with a business interest in the production and supply of electricity and gas for domestic and business consumers. Our membership covers over 90% of both UK power generation and the energy supply market for UK homes. We represent the diverse nature of the UK’s energy industry – from established FTSE 100 companies right through to new, growing suppliers and generators, which now make up over half of our membership.

Our members turn renewable energy sources as well as nuclear, gas and coal into electricity for over 27 million homes and every business in Britain. Over 730,000 people in every corner of the country rely on the sector for their jobs, with many of our members providing long-term employment as well as quality apprenticeships and training for those starting their careers. The energy industry invests £12bn annually, delivers £88bn in economic activity through its supply chain and interaction with other sectors and pays £6bn in tax to HMT.

Energy UK has 24 retail members. This includes the following domestic suppliers: Bristol Energy, Centrica, Co-op Energy, Ecotricity, EDF Energy, Engie, E.ON, ESB, Extra Energy, Flow Energy, Good Energy, Green Star Energy, Npower, Octopus Energy, Ovo Energy, Scottish Power, Spark Energy, SSE, Utilita, and Utility Warehouse. There are differing views on the proposed cap within our membership, therefore we do not take a view on the principle of a cap.

Summary

We welcome the opportunity to respond to the Committee’s call for evidence on the Domestic Gas and Electricity (Tariff Cap) Bill. Energy UK has put together the following response, which provides our general views on key parts of the legislation which will impact on the activities of our members and their customers.

Our main concerns are:

· Ensuring competition and engagement in the market continues to grow;

· That the cap should reflect suppliers’ costs including, for example, the costs of undertaking the smart metering programme

· That there is an appropriate Competition and Markets Authority (CMA) appeals process; and

· That there is greater transparency and clarity on how Ofgem will set the cap - and the conditions for lifting it.

The energy retail market

Today the retail market has more suppliers and more choice than there has ever been. There are now over 65 suppliers in the domestic retail market for consumers to choose from and there has long been a similar number in the non-domestic sector. Last year over 5.5 million consumers switched their electricity supplier [1]  , the highest number for almost a decade. As a result of such developments, the market share of the six largest energy firms has fallen from 99% in 2011, to 79% [2] today.

Energy suppliers in GB are also committed to doing more to improve engagement and drive up switching. This is why Energy UK launched the Energy Switch Guarantee (ESG). The ESG was launched just over 18 months ago and now covers over 90% of the retail market. The ESG aims to give customers confidence that when switching energy supplier the process will be simple, speedy and safe. Nine in 10 customers who switched their energy provider were happy with the process and over two thirds said that having the ESG in place made them more likely to switch.

It is important that this Bill does not negatively impact such developments. While the Bill may cap the cost of Standard Variable and default tariffs, customers could save hundreds of pounds by switching their tariff and/or supplier.

However, we know that some customers find it harder to engage in the market. This can often be the case for customers who find themselves in vulnerable circumstances. In January 2018 Ofgem announced plans to extend the existing safeguard tariff cap for vulnerable customers to 5 million customers. Energy UK supports efforts to assist customers in vulnerable circumstances and we have recently launched a year-long independently chaired Commission on Customers in Vulnerable Circumstances. [3]

Energy UK believes this Bill could be strengthened in a number of areas to protect the interests of current and future consumers and ensure switching continues to create pressure for companies to improve their performance.

Appeals process

Energy UK [4] is concerned the Bill does not allow for appeals to the CMA on how Ofgem sets the cap and instead only makes provision for appeals via Judicial Review (JR). The fact that JR is available does not mean that it alone is sufficient to ensure that any decision made by Ofgem in constructing and setting a cap is right. JR is designed to ensure that a decision by Ofgem is legal (i.e. within its powers and having followed proper procedure) – it is not a substantive appeal. Appeals to the CMA are designed to ensure that Ofgem’s decisions are correct in substance (e.g. economic implications and use or assessment of the facts), as well as their legality. A CMA appeals process would also allow other interested parties, such as consumer groups, to appeal Ofgem’s decision on substantive grounds.

The need for effective appeal rights for regulatory decisions, particularly with regards to price controls, is widely accepted. The CMA is the arbiter on price controls in electricity and gas networks and in all other utility sectors (water companies, Openreach, mobile operators) and, as the competent expert body, it should also be the arbiter for price controls for retail energy supply.

Our aim in looking for changes to the appeals process in the Bill is not to undermine or delay the implementation of a price cap. Instead it is about the regulatory process and the checks and balances that need to exist to ensure a transparent and fair process - and that customers and competition are adequately protected. Any appeal to the CMA does not need to delay or stop the implementation of the cap as it could run co-currently with its implementation and could be quicker than the JR process.

Ofgem duties – Clause 1(6)

Ofgem’s duties set out in the Bill differ from Ofgem’s existing regulatory duties. It is important that any differences do not create conflicts or regulatory uncertainty. In particular we would highlight:

a. 1.(6)(d) currently states that in setting the cap the Authority must have regard to "the need to ensure that the holders of supply licences who operate efficiently are able to finance activities authorised by the licence". The Bill is, however, silent on how the benchmark for an efficient supplier will be set. We note that this will be a key challenge for Ofgem in developing any cap. It is also already implicit in Ofgem’s current duties to incentivise suppliers to operate efficiently. This is reiterated in 1.(6)(a) which explicitly requires Ofgem to "create incentives for holder of supply licences to improve their efficiency".

Ofgem consultation – Clause 2(3)

We have noted that before making the first licence modifications, Ofgem "must" consult on the methodology to be used, whereas on any subsequent licence modifications it is a "may" consult. We believe that Ofgem should be required to consult on any material changes to its methodology for setting the cap. This is in line with the current arrangement around making amendments to the supply licence.

Notice of modifications - Clause 4(2)

As per its existing approach to consultation, and in the interest of transparency, Ofgem should also be required to set out its rationale for making any modifications.

Six monthly review - Clause 6

We consider Clause 6 could be more specific on what a six monthly review should entail when determining whether the cap level should be amended. The addition of Clause 6 was based on a recommendation of the BEIS Select Committee. The Select Committee based their recommendation on the need for timely reviews of the cap in order to keep up with changes in supplier costs and consumer engagement - i.e. Ofgem’s review should also be looking at the impact on the market and not just the movement in costs.  On this basis we believe the Bill should be clearer on what form of a review should be undertaken. 

Principles for removing the cap – Clause 7

In the absence of a clear and realistic definition of "effective competition", Energy UK believes the decision on whether any cap should be extended beyond 2020 should, as a minimum, sit with the independent regulator Ofgem rather than the Secretary of State and be based on the analysis undertaken in line with Clause 7(1).

Consequential modifications - Clause 9(1)

As drafted, the Bill gives Ofgem powers to make amendments to the energy supply licence following the removal of the cap. Energy UK is concerned that the proposed powers are very broad and could be used more widely by Ofgem than originally intended over their lifetime. It is important Ofgem follows standard process should they look to make any modifications which are not directly and specifically necessitated by the removal of the cap.

March 2018

 

Prepared 13th March 2018