The government’s new Draft Domestic Gas and Electricity (Tariffs Cap) Bill has just been released. It will force the energy regulator Ofgem to change license conditions for energy companies, and force them to cap prices on standard variable tariffs. The proposals are currently set to last until 2020, but the government is considering extending the cap until 2023 if it’s successful. It’s unlikely that the bill will take effect in time for this winter, with the estimate start currently being February 2018.
Currently over 12 million households are on standard tariffs, resulting in them paying a lot more than they would on the cheapest deal. It’s predicted that it could mean substantial savings for the 1 million of the most vulnerable households. According to Business and Energy Secretary Greg Clark, customers of the top six suppliers are “overpaying to the tune of £1.4bn a year”. He added – “That is simply wrong. The draft legislation would send a “clear message to suppliers they must act to put an end to loyal consumers being treated so unfairly”.
Could the bill threaten competition?
There are some concerns being raised among the energy companies as to how effective the new cap will be. The CMA (Competition and Markets Authority) have advised against the proposals, and Sam Smith, director of Flipper and former member of Ofgem has recently stated that “A regulated price means people will switch off and think ‘the governments looking after me’,”. He claims there’s a possibility that a cap could push up fixed fees, harm competition and end up costing consumers more in the long term.
The chief executive of one of the leading energy providers E-On has also said recently that “A price cap will not be good for customers. It will reduce engagement, dampen competition and innovation.” He also claims that “We are actually in a situation where the market is working quite well. We have 60 competitors. We have high levels of switching … A cap will actually dampen competition, reduce engagement and take us backwards. There will be less incentive for new challenger firms to come into the market, and customers will have less incentive to engage with the market”
Benefits to low income households
However, the argument being made by smaller suppliers is that the cap has been caused by these larger suppliers in the first place. By keepings millions of customers of high priced tariffs, they’ve contributed to the rising number of vulnerable households being unable to afford their gas and electricity bills. It’s estimated that 10% of households (2.3million) are struggling to pay their current energy bills. This new draft will help to ensure that vulnerable families and individuals are on the cheapest rates, and not left on standard rate tariffs. For the lowest income househols, the new bill will of substantial benefit to them and help to decrease levels of fuel poverty.
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