News & Insight

Energy price cap - Government to legislate against rip-off tariffs

Oliver Jones

Yesterday, parliament considered a cap on the rates energy companies can charge consumers.

Energy price cap – Government to legislate against “rip-off” tariffs

Today, parliament’s due to consider a new energy cap that will reduce the amount by which energy providers can raise their SVTs, or standard variable tariffs.

Hailed by the government as a way of “forcing energy companies to change their ways”, and criticised by energy companies as potentially damaging to competition (and hence to consumers), the move is an answer to a 2016 Competition and Markets Authority (CMA) report, which found that Big Six customers were paying £1.4 billion a year more than they would in a genuinely competitive market.

You’re almost always better off switching provider

The best practise for both consumers and small businesses is to always negotiate a fixed-rate contract. These are invariably cheaper (see what I did there?) than variable-rate contracts, and are the best way to keep your energy spend within budget.

Customers who either don’t negotiate a contract in the first place, or who fall out of contract and fail to negotiate a new one, are placed by default onto an SVT, which can be almost twice as expensive as the cheapest fixed-rate deals.

This is the practice the government regulation seeks to curb by capping variable rate tariffs. The CMA was especially concerned that older and low-income consumers were the ones most likely to be overpaying on their bills – and the least able to afford them.

The Domestic Gas and Electricity Bill

The government, moving in on Labour’s political territory, is using strong language to promote the new legislation, promising an end to “rip-off” bills. It claims that the price cap will reduce annual energy bills by £100 for 70% of the market – or 18 million households.

This is not the first time such a measure has been proposed. In 2013, rising energy prices brought a similar political focus on energy profits. Ed Milliband’s 2015 campaign proposed a price cap similar to the one being debated tomorrow. At the time, it was dismissed by the Conservative government as “dangerous” and potentially damaging to market competition and investment.

The effect on competition

With SVT profits curbed, it is feared smaller energy companies will become unprofitable, and that new energy companies will be discouraged from entering the market.

The culling of the smaller energy companies could remove larger energy companies’ incentive for offering cheap fixed-rate deals, with the unintended consequence of making energy bills more expensive overall.

The CMA report itself did not advocate for a market-wide cap, preferring options which specifically addressed the concerns of vulnerable consumers, particularly those on pre-pay meters.

It’s also feared that Britain’s largest energy companies will react by scaling back investment and cutting jobs in order to protect their profit margins, to the detriment of the UK’s energy economy. Centrica (which owns British Gas) fired 4,000 employees worldwide last year, using the possibility of a price cap as part of their rationale.

The takeaway

Regardless of the eventual effect of the bill, the situation for energy customers remains the same. You should be aware of when your present contract ends, and be prepared to switch to a fixed-rate tariff as soon as it does. This will also shield you from changes in the price of energy, which is predicted to rise further this year.

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