Following months of speculation, manifesto commitments and exchanges with the regulator (Ofgem), the Government published on 12 October 2017 the draft Domestic Gas and Electricity (Tariff Cap) Bill in which it set out its plan to introduce a temporary absolute price cap on standard variable and default tariffs. This report is our response to the Government’s invitation to scrutinise the Bill and make recommendations to improve it. It contains our assessment of the situation the Bill aims to redress and the outcomes it aims to achieve against extensive evidence.
Energy is a special and essential service. For this reason, the operation of energy markets is held to high standards. Sadly, 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. Customer loyalty should be rewarded by suppliers, not exploited. Regardless of customers’ reasons or obstacles to switching suppliers, no one should be penalised disproportionately for not engaging with competition, nor should it be a requirement that consumers constantly defend themselves against excessive charges. Where markets fail to deliver fair outcomes, intervention is justified.
Suppliers most at fault did not take repeated warnings from the Government seriously enough: we were underwhelmed by the feeble steps announced by some of the Big Six in the hope to avoid a cap. Those retailers who were found by the Competition and Markets Authority to be operating inefficiently and passing excess costs onto standard variable and default tariff customers have brought this intervention upon themselves. We hope they start treating their loyal customers more fairly in the future.
The market has been dysfunctional for years. And yet Ofgem has been too slow and reluctant to use its extensive powers to step in and protect the interests of customers, especially vulnerable customers. It took repeated nudging and too much time for the regulator to start actively protecting some customers from overcharging. We urge Ofgem to be more proactive in the future in meeting its statutory duties towards consumers. We expect it to work hard with various stakeholders to find new ways to engage customers who have the most difficulty in switching in the future.
These repeated failures have led us to support the Government’s initiative to set a temporary absolute price cap on standard variable and default tariffs. We agree with the Government that the evidence is on balance against a relative price cap: it would create a perverse incentive for suppliers to increase their lowest prices to keep their profit levels constant. An absolute cap also bears a risk of increasing prices but this risk is lesser and it 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. We concluded that the Competition and Markets Authority’s Energy Market Investigation remedies alone would not necessarily fix the problems in the market soon enough.
We trust Ofgem will be able to set a cap that meets most of the requirements listed in subsection 1(6) as the Northern Ireland experience proves that regulation and competition can co-exist usefully. We recognise that setting a cap that meets all five requirements will be a challenging task which may lead to legal challenges. We are confident these challenges could be won by the regulator provided that the Government clarifies that not all requirements need be achieved at once. The Bill should be amended to require that Ofgem review the level at which the cap is set at least every six months.
We believe the Government should take Ofgem’s concerns about the green electricity tariff loophole seriously and amend the Bill accordingly. The exemption, which we otherwise welcome, should be extended to green gas tariffs.
We support the Bill’s sunset clause as it guarantees the temporary nature of this intervention.
We were satisfied with the Government’s rationale for leaving the regulator in charge of assessing the “conditions for effective competition” both when setting and recommending whether to keep or remove the cap. It is also right that the final decision sits with the Secretary of State.
This inquiry has helped to shed light on the role that smart meters will be called to play in customer engagement once fully rolled-out. We will welcome confirmation from the Government that it does not place undue hopes on smart meters and that instead it will work to ensure that once the cap is lifted suppliers cannot go back to their exploitative practices.
Finally, we ask the Government to confirm what long-term measures it will implement for the protection of vulnerable customers and that it seeks to ensure the Bill receives Royal Assent before the parliamentary summer recess.
9 February 2018