Is the energy price cap working? Iain Conn, the chief executive of British Gas owner Centrica has 300m reasons why he thinks it has failed, as it has lopped that much off the firm’s profits. The cap, he says, is strangling competition in the market and could also strangle supply, as energy companies stop investing.
The knee-jerk response will be ‘well, he would say that’. But there are lots of things not working in this market: 11 ‘challenger’ providers have collapsed in recent weeks; the number of tariffs available to customers has fallen; and the standard dual-fuel price has jumped alarmingly – not least British Gas’s own 10% price rise last week.
The price cap should be the ceiling for the market, but has instead become the target. Since the regulator raised the cap to £1,254 from April for the average customer, every one of the big six have hiked bills to that level, which will cost UK consumers around £1.3bn. Price ‘bunching’ – even from the challengers – is emerging.
But let’s not worry too much about Centrica’s profits; its margins (until now) have been around 8%, an outlier among the big six, which mostly trade on around 4-5% margins.
A test of a price cap is market withdrawals; if too many providers flee, then evidently the cap is too low. The good news is while there have been rumblings, no major provider is yet heading for the exit, suggesting the cap is working.
The bad news is that Conn says British Gas has typically made around £42 to £65 profit per customer and this will plunge to around £20 next year, directly attributable to the cap. At that level, he’s adamant it will curb investment in service and innovation. Let’s see.
Yet the problem with energy privatisation – and largely why the cap was introduced – is that it assumed price-conscious consumers would hop between providers, saving money and driving efficiencies. It hasn’t happened; 11 million households still remain on the default (high cost) tariff. The winners have been the young, educated and the healthy. Those who haven’t switched and therefore pay higher bills are frequently the disabled, the ill-educated and the elderly. Is this really the outcome we wanted from energy policy?
Before price capping the cheapest tariffs were £400 better than the worst, while now the figure is closer to £160. Conn says this is evidence of a collapse in competition, others will argue that bonus for switching was too big, and went to already well-off households. The pricing differential on what is after all largely a commodity product has been unfair to those groups less equipped or inclined to switch. Narrowing it is a bonus, not a loss.
Conn himself admits that the cap is “not dreadful in all respects” but argues it’s not the right way to fix what he also admits is a broken market. It’s still in its infancy and much of what has happened so far could have been predicted. Let’s give it more time before declaring success or failure.