Price and prejudice

John Grantchester on the need for Ministers to ensure a fair deal on domestic energy costs

Today in the House of Lords, the Domestic Gas and Electricity (Tariff Cap) Bill will have its first day in committee. A long overdue admission from Ministers that the energy market is fundamentally broken and needs to be changed. Too many people, for far too long, have been paying over the odds for their energy. After years of political posturing, it is imperative that the government introduce the price cap in time to help customers this winter.

The Bill will allow energy regulator Ofgem to temporarily limit how much companies can charge customers for their standard variable tariff (STV) – something customers are usually moved to after a fixed-term deal. This is due to the prevalence of ‘tease and squeeze tactics’, where energy suppliers lure customers in with a lowest, 'best', tariff (the one that appears at the top of price comparison sites) for a fixed period. After a year however, customers are moved onto the more expensive SVT, paying over £300 more for their energy without realising.

Ofgem estimates 70% of customers languish for years on rip-off SVT – with the current system often prejudicing against older people, and those with disabilities or on low incomes. Social justice demands the government intervene. It should stop energy companies from overcharging customers to subsidise cheap or even loss-leading initial offers that only benefit engaged, internet savvy, switchers.

The proposed price cap is essential to tackling these practices. But, as is often the case with legislation, the devil is in the detail.

Firstly, the Bill requires Ofgem to determine the level at which the cap is set. This will involve consideration of new incentives for suppliers to improve efficiency, enabling suppliers to compete effectively, and maintaining incentives to switch between suppliers. It will also mean ensuring the holders of supply licences are able to finance activities for which they are authorised. But where is the need for Ofgem to devise a scheme that benefits consumers? 

Secondly, the Bill introduces a temporary cap until 2020 that can be extended up to 2023 – if conditions for effective market competition are not in place. It does not however, set out the criteria against which this will be determined. So we are currently unclear how success will be judged, or how it will be extended or lifted?

Thirdly, the Bill allows Ofgem to exempt ‘green tariffs’ chosen by customers from the price cap. In the Commons, the government stipulated that any such exemption would only take place once Ofgem was satisfied it would support the production of renewable energy. This proviso is missing from the legislation and we remain concerned that unscrupulous suppliers could exploit the loophole to game the market.

Labour will be using the Lords Committee stage to probe these all of areas and seek assurances from Ministers that consumer interests are at the heart of the Bill. To deal with ‘tease and squeeze’ practices, we will introduce an amendment creating a transitionary relative price cap on the differential between the highest and lowest price charged by each supplier. This will prevent those customers moving back onto SVT from being hit with a massive jump in costs. Switchers could still switch onto a cheaper deal if they wish, and loyal customers would not be overcharged.

We want all customers to benefit from low energy prices. A temporary absolute price cap is not a magic bullet and cannot alone create the conditions for effective market competition.

Lord John Grantchester is Shadow Energy Minister in the House of Lords

Published 11th June 2018

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