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”.
76.We heard some evidence suggesting that 2023 was an arbitrary date or that the Bill should not have a sunset clause and that the cap should last until the market is fixed. However, the majority of the evidence, including the Government’s, pointed towards a temporary intervention. 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” as it remains committed to market competition.
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.
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. 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.
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.” 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.
82.The Bill’s sunset clause coincides with the sunset clause for the Smart Meters Bill currently before the House 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”. The evidence cited by the Government 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. The witnesses we heard from were also sceptical about relying on smart meters to transform customers’ likelihood of shopping for the best deal.
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.
134 , subsection 6(6)
135 Centre for Competition Policy ,
136 Citizens Advice , [Hayden Wood; Patrick New],
137 Department for Business, Energy & Industrial Strategy, , published 11 December 2017; Department for Business, Energy and Industry Strategy
138 Ofgem ; Professor Martin Cave OBE ; Energy Policy Group ; ScottishPower ; uSwitch.com ; Co-op Energy ; Confederation of British Industries ; Cornwall Insight ; MoneySuperMarket.com ; Centrica plc ; Mr John Penrose , Which? ; E.ON ; OVO Energy ; First Utility ; Bristol Energy ; SSE
139 [Claire Perry]
140 [Claire Perry]
146 [Dan Monzani]
147 Ofgem, , 21 September 2017, p10
148 ; ; ;
9 February 2018