Pre-legislative scrutiny of the draft Domestic Gas and Electricity (Tariff Cap) Bill Contents

6Measuring success and removing the cap

Clauses 6 and 7: the sunset clause

75.The Bill’s sunset clause is set at 2023 but the cap could be lifted as early as 2020 depending on Ofgem’s annual reviews and the Secretary of State’s assessment of whether the “conditions are in place for effective competition”.134

76.We heard some evidence suggesting that 2023 was an arbitrary date135 or that the Bill should not have a sunset clause and that the cap should last until the market is fixed.136 However, the majority of the evidence, including the Government’s,137 pointed towards a temporary intervention.138 The Government told us the sunset clause was a guarantee that it does not end up “in the business of setting energy prices over the long term”139 as it remains committed to market competition.140

77.We support the Government’s view that the price cap should only be a temporary measure. As a result, we believe that removing the sunset clause would make removing the cap too challenging and would put the Government unduly in charge of setting energy prices for the foreseeable future. We favour a return to unbridled competition once the customer detriment is removed.

Clauses 6 and 7: the conditions for effective competition

78.The Minister told us she was wary of defining how “the conditions for effective competition” would be measured although she hoped it would be one where loyalty is rewarded, where the detriment is reduced and where vulnerable customers are protected.141 The Government decided to make Ofgem responsible for assessing whether changes in the market under the cap would lead to “the conditions for effective competition” because of the regulator’s expertise in matters of competition. Dermot Nolan listed some of the indicators the regulator may use for this assessment.142

79.As previously mentioned, the evidence from many stakeholders makes it clear that “effective competition” could be measured in different ways and that this could be a point on which the Government’s policy will be challenged in the courts. However, the Minister explained that giving too strict a definition of “effective competition” could “stimulate unintended consequences, or be incredibly prescriptive about what the market should look like, because there is so much change and innovation.”143 We believe that setting a definition of “the conditions for effective competition” before setting the cap could create incentives for suppliers to game the system or treat the cap as a box-checking exercise rather than going above and beyond their obligations. It would also risk creating unnecessary opportunities for legal challenges.

80.It is right that the decision to keep or remove the cap is left to the Secretary of State, based on Ofgem’s assessment, as the Government is responsible for introducing the legislation and setting its objectives. We believe that Ofgem have the required expertise to set and measure indicators of effective competition and make the appropriate recommendation to the Secretary of State.

81.We recommend that the Secretary of State base the decision to keep or lift the cap on the minimum requirements that overcharging and the differential are substantially reduced, fairness is improved, and vulnerable customers are protected.

Clause 6: Smart meters

82.The Bill’s sunset clause coincides with the sunset clause for the Smart Meters Bill currently before the House144 and the first review date for the cap is 2020 — the date by which the Government also intends the smart meter rollout to be completed. The Tariff Cap Bill appears to have been timed to fit alongside the smart meter rollout and benefit from the changes it will bring to the market. In subsection 6(2) Ofgem is explicitly required to “consider the extent to which progress has been made installing smart meters for use by domestic customers” when making its assessment of the market.

83.However, the Government has acknowledged that smart meters are “an enabler, not a determinant of switching”.145 The evidence cited by the Government146 shows that small increases in likelihood of switching amongst owners of smart meters are linked to customers who already are more likely to be engaged.147 The witnesses we heard from were also sceptical about relying on smart meters to transform customers’ likelihood of shopping for the best deal.148

84.Given the slim evidence that smart meters have any substantial impact on customer switching rates, we 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.

85.Once the cap is lifted, 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. Engagement measures currently rolled out should also be maintained to keep encouraging customers to switch suppliers.

135 Centre for Competition Policy PLS0049,

136 Citizens Advice PLS0021, Q333 [Hayden Wood; Patrick New], Q79 [Peter Smith]

137 Department for Business, Energy & Industrial Strategy, Impact Assessment: Draft Domestic Gas and Electricity (Tariff Cap) Bill, 29 November 2017, published 11 December 2017; Department for Business, Energy and Industry Strategy PLS0038

138 Ofgem PLS0045; Professor Martin Cave OBE PLS0044; Energy Policy Group PLS0036; ScottishPower PLS0034; PLS0033; Co-op Energy PLS0030; Confederation of British Industries PLS0029; Cornwall Insight PLS0027; PLS0024; Centrica plc PLS0022; Mr John Penrose PLS0019, Which? PLS0016; E.ON PLS0014; OVO Energy PLS0008; First Utility PLS0004; Bristol Energy PLS0002; SSE PLS0052

139 Q458 [Claire Perry]

140 Q431 [Claire Perry]

145 Q461 [Claire Perry]

146 Q462 [Dan Monzani]

147 Ofgem, Consumer engagement survey 2017 report, 21 September 2017, p10

148 Q230 [Ed Kamm]; Qq316-317 [Hayden Wood]; Q319 [Patrick New]; Q340 [Dermot Nolan]

9 February 2018