Energy Caps and Tariffs, is it possible to find a balance?
Every year there seems to be a hike in energy prices. Rarely do we hear any good news about energy prices falling or statements that our bills will be cut. However, with the upcoming election on June 8th, the Conservatives are claiming that they will end “rip-off” energy bills. It’s an attractive promise on the surface; we all pay our energy bills and we can all see how they keep on rising year on year. It is an idea that has been suggested before and yet there seems to have been no traction on this promise; the prices keep rising. The current pledge, made last week has already been met with heavy criticism and even ridiculed for the potential impact it will have on consumers in the long run, including scepticism that prices will increase regardless. Where the political attention is focused on capping prices for domestic tariffs, they have exempted energy intensive industries from many of the regulatory costs that have pushed electricity prices up by 43% since 2010. This has impacted small businesses hard causing them to carry the cost of many years of misguided intervention in the energy markets.
Although the predominant focus of Theresa May’s pledge was for the domestic market, imagine a price rise of 10% on your business energy bill? The costs that affect the domestic market will affect the business market in turn and most likely not for the better.
Five of the “Big 6” energy companies have increased their prices this year. This year alone three companies have announced price increases of just under 10% on dual-fuel standard variable tariffs (SVT for short). In February, Npower announced an increase of 9.8% and in March E.ON said it was raising charges by 8.8% from April onwards.
“Recent evidence does not support regulatory intervention to set prices – consumer costs have risen, and will continue to rise after the early CfDs awarded contracts far above levels that are being achieved today for offshore wind that will be constructed in parallel, and the much criticised £92.50/MWh for Hinkley Point.UtilityWise
This policy may bring some short term respite from rising energy prices, but risks pushing costs onto small businesses, and brings little long term benefit.
This focus on price, rather than cost, distracts from the best way to reduce long term costs through reducing consumption.”
EDF raised electricity prices in December but cut gas prices, amounting to a 1.2% increase. Scottish Power hit its customers with a 7.8% price hike, averaging £86 extra a year. While Centrica (who own British Gas), has said it will freeze prices until August.
Even those that had switched to smaller sized companies felt the sting: Good Energy went up 11%, First Utility increased by 9.7%, Utilita by 2.9%, Co-operative energy up 5%, and finally Ovo Energy up 1.5%. The reason for these increases in prices? The major energy companies state that it is primarily due to increases in wholesale pricing and installation costs of smart meters. The latest increases come despite the energy regulator Ofgem recently saying it saw no reason for the “Big 6” to raise prices, because of the way they protect themselves against losses when purchasing power. Scottish Power broke down it’s £86 a year increase in costs like this: £54 was a result of the higher wholesale prices, £18 for government levies for environmental schemes, £10 for smart metering and £4 for VAT.
Active and Passive
The idea of a cap has been supported by several key figures, including the professional body Citizens Advice. James Plunkett of Citizens Advice has put forward his idea of a cap by stating the energy market was broken into two parts, active and passive. One is “active” because customers switch providers and there is fierce competition to bring down prices, and one is “passive” that results in rip-off rates. He argued that a cap on the standard variable rate would “put a ceiling on prices, to stop the most unreasonable exploitation of passive customers” without affecting the competitive end of the market. He argues that a cap on prices won’t affect competition (a common argument against a cap from energy companies). Worryingly, his analysis suggested some domestic consumers lose as much as £300 a year because of poor-value tariffs, and with an increase set to happen every year, that figure is set to rise.
How to solve a problem like an energy cap?
SVTs are the common standard tariff for most households, an estimated 7 out of 10. Many believe that a cap on SVTs would genuinely help consumers, particularly a relative cap rather than an absolute cap. Relative caps would tie the cost of the SVTs in relation to the companies cheapest tariff. On the other hand Centrica said it did not believe in “any form of price regulation”, citing evidence from other countries that it pushed up average prices. John Penrose, a Conservative MP who has led calls for a relative price cap, said Centrica’s warnings of higher prices were an empty threat:
“It isn’t sustainable for the Big 6 to threaten they’ll scrap their cheapest tariffs. They would condemn themselves to a slow commercial death, milking a declining customer base because they wouldn’t win any new business.”
The latest guidance issued by the government in April of this year has not aided matters for some businesses. The new guidance details planned exemptions for Energy Intensive Industries (EIIs) to help reduce their CfD charges. While some businesses will see a reduction in charges, the discount will result in higher charges for the rest of the UK, especially non-exempt businesses. The exemption is on the eligible electricity used by the EII. Based on a site’s usage, not all of their metered volume could be considered to be eligible. In addition, this is likely to change from year to year. This further underlines the inherent uncertainty over potential cost imports for final bills, as the volume of those taking part will be highly variable. For more information on whether your business is exempt from certain CfD charges click here.
Alternatively, Government interventions may be part of the problem, according to Richard Neudegg, the Head of Regulation at uSwitch:
“Tinkering with ideas like price caps as a magic bullet to bring down energy bills is a knee-jerk reaction that will leave consumers even more out of pocket in the long term,”
“Price caps may sound good on paper, but would remove the incentive for energy companies to drive down prices and fight to keep their customers. It would be a death knell for competition.”
The mere threat of government intervention was actually causing price rises for consumers, Neudegg said, because suppliers were withdrawing their best tariffs. Some are also potentially increasing prices on their cheapest tariffs in anticipation of interference.
Whatever happens, we can be certain that for the foreseeable future, for the vast majority of us our energy bills will go up. However, there is hope that an energy cap could realistically help us all save money but with the major caveat that it needs to be implemented properly and fairly for all. Do you think an energy cap is realistic?
Please let us know in the comments section below.