Speakers: Rob Salter-Church, Ofgem Director of Consumers and Markets; Jemma Baker, Ofgem Head of Retail Price Regulation
14th November 2018
All-Party Parliamentary Group on Energy Costs
Ofgem’s plans for the cap on default energy tariffs
Chair: Julie Elliot MP
Speakers: Rob Salter-Church, Ofgem Director of Consumers and Markets; Jemma Baker, Ofgem Head of Retail Price Regulation
Chair’s Opening Remarks:
I’d like to extend a warm welcome to you all to this, the 47th meeting of the All-Party Parliamentary Group on Energy Costs.
I am Julie Elliott, the Labour MP for Sunderland Central, and a vice-Chair of this Group.
Last week, Ofgem set the final level of the temporary price cap and confirmed it would come into force on 1 January 2019.
They also told us that a small increase in the final figure came as a result of their September consultation, and that a further increase would be likely in April.
Dermot Nolan, chief executive of Ofgem, did not mince words.
He said: “From 1 January, the energy price cap will put an end to customers on default tariffs being overcharged by as much as £1billion for their gas and electricity. The price cap will ensure that whether energy costs rise or fall suppliers are not feathering their nest and changes in energy prices will reflect the underlying costs.”
So, I am really pleased to welcome two speakers from Ofgem here this evening to tell us more about it.
We have with us Rob Salter-Church, Ofgem’s Director of Consumers and Markets and Jemma Baker, Ofgem’s Head of Retail Price Regulation.
Rob Salter-Church, Ofgem Director of Consumers and Markets
The cap for us is an important part of our retail markets strategy and it’s designed to get better outcomes for consumers. It’s an important temporary protection while we undertake our longer-term reforms to get a better energy market that delivers better energy outcomes for everyone. It’s a safe harbour for disengaged customers today.
There are four things I want to talk about today: a bit of background; how it works in practice; the approach that we took to setting the cap; our work to reform the market once the cap is in place.
Background: Ofgem shares the Government’s concern about the energy market, which has not worked well enough for all consumers. That’s why some time ago we referred the market to the Competition and Markets Authority for a thorough investigation. While the market has worked well for those customers who engage and switch supplier, the other 60% have been stuck on poor-value deals paying up to £300 more than they could be. Following the CMA investigation we introduced a price cap last year for customers with prepayment meters, alongside a package of other reforms designed to promote competition. Alongside that we have had a number of conversations with Government and a number of parliamentarians about introducing broader price protection for all 11 million customers who are on default tariffs. At Ofgem we have always thought that an intervention of that scale was something for Parliament to consider and take a decision on, and not for us as an unelected regulator. Back in January this year the Government introduced the Tariff Cap Bill and it’s these powers we have used to introduce the cap. However, while we were in discussions around a broad tariff cap, we thought it was only right to quickly introduce price protection for a targeted group of vulnerable customers, so earlier this year we also introduced a cap on warm homes discount customers using the prepayment meter methodology. That came into effect in February and is a temporary measure with a predefined end date, and it’s something we did quickly to provide equivalent protection to the default tariff cap coming down the line. Together with these existing safeguard tariffs we are protecting five million vulnerable customers already.
Just before the summer recess Parliament passed the bill to give us the powers, and it also sets out the objectives for protecting customers on default and standard variable tariffs.
During that process we set out an aim to introduce the cap by 1st January 2019, and I’m pleased to be able to say that we have met our aim. The cap will provide important backstop protections for 11 million customers on default tariffs. What it means is that these customers will always pay a fair price for their gas and electricity, and that price will reflect the underlying cost of supplying the energy. It will save customers £76 on average, but customers vary in their consumption levels and the amount they save will depend on the amount they use.
The way it works is that the cap sets a maximum price that suppliers can charge: a maximum daily rate, a maximum standing charge, and a maximum unit rate. All suppliers will have to reduce their rates by 1st January so that they are in line with these.
We’ve set the cap using a bottom-up process: we have established what we think is a fair cost for an efficient operator, including sourcing the electricity and gas, network charges and policy costs, and we have put all these together to get what we think is a fair price. As well as looking at what is an efficient set of costs for a supplier, we’ve also included what we refer to as “headroom”. Essentially that is an uncertainty allowance. It’s difficult to make predictions exactly around costs, and there will obviously be unforeseeable events that will happen in the future, so the headroom allowance is there to ensure that suppliers have sufficient revenues when there are unforeseen events.
The price cap level will be updated twice a year, in April and October, using the latest estimated costs of electricity and gas. From 2020 Ofgem will produce an annual report to the Government on whether the conditions for effective competition are in place so that the cap can be removed. As Julie said at the beginning, this is a temporary cap, and our reports will go to the Secretary of State who will make the decision about whether it is right to remove the cap. Ultimately the cap cannot last beyond 2023 and the legislation does not permit the cap to be extended beyond that.
When we looked at setting the overall cap level, we kept first and foremost in mind that the object was to protect the customers on default tariffs. The underlying legislation also required us to have a due regard for four things:
- Creating incentives for suppliers to become more efficient
- Maintaining incentives for customers to switch their energy supplier
- Supporting competition between suppliers
- The ability of an efficient supplier to be able to finance their operation
So we’ve had regard for all of those matters in setting the cap. Now the price cap is, as our CEO Dermot said, going to require suppliers to raise their game. They will have to become more efficient and those that do will be able to have a competitive business and make a fair return.
We think there will still be opportunities for companies to compete with the proposed level of the cap. There are 70+ suppliers in the market, most of which are smaller with more efficient costs and prices already below the level of the cap, and we expect that to continue. Our advice to customers who want to save money is to switch to a competitively priced tariff that is below the level of the cap. What the cap does is provide important backstop protection by removing the worst of the excessive charges that we’ve seen suppliers impose. There are likely to be better deals for customers.
Turning to the future, and the process of removing the cap. Whilst we’re confident that the cap will work to provide important temporary protection, in the long run Ofgem thinks that the best way to get good outcomes for customers and to keep suppliers efficient, is through competition. When the cap is lifted, we can’t go back to a market where two-thirds of customers are on default deals paying significantly more for their energy than they should. That’s why we have a programme of work which we are executing alongside the cap to try to deliver a better market that works better for all consumers.
Early this year we published our conclusions from our call for evidence on the future of the retail market. We concluded that the current market framework needs to change. The current market makes it difficult for innovators and new entrants to bring exciting new products and services that will get customers to engage, which creates barriers to innovation and competition.
The nature of the market is evolving on the back of new data, new technologies and new ways of transacting around energy. What we need to do as a regulator is to ensure that the market framework does not get in the way and supports these changes which will ultimately help customers to engage and get better deals for their energy. We want to encourage innovation and new suppliers with different business models who will use new data and new technologies. One of the things that we are doing to try to achieve that are the introduction of faster and more reliable switching which will allow people to switch at the end of the next working day, and will greatly improve reliability. At the moment switching takes 21 days at best, and we know that they often go wrong, which deters customers from switching in the future. Our changes will make it much easier to switch.
To further encourage customer engagement we are also introducing automatic compensation for customers if a switch does go wrong. This will sharpen incentives on suppliers to make sure they get switching right first time, and give customers more confidence about switching.
We are also running a number of trials looking at different ways to help customers make choices about their energy bills. For example, we recently concluded a hassle-free collective switch trial where we worked with a trusted third party to take the burden of finding new deals away from disengaged customers. The third party was able to go out and negotiate on behalf of the group and provide them with a personalised quote using data from their old suppliers. That delivered an 8-fold increase in switching and these were people who hadn’t switched for three years or more. We were really pleased with that trial and we’re doing more of them because we think they could be a really important way to get more customers to engage and get better deals for their energy.
Now of course the roll-out of smart meters also has the potential to transform the energy market, and that will make good progress while the cap is in place.
We’re also changing some of the market rules to make it easier for businesses models such as auto-switching services to work, and we will also ensure that customers will be properly protected if they work with these kind of companies. Key to that and some of our other initiatives is to unlock data and make it easier for customers to share their data with other parties if that is what they want to do.
Taking all of this together, it means that suppliers are going to have to rise to the challenge to make this market more competitive for all consumers, and they will have to do that if they want to see this cap lifted sooner rather than later.
So maybe just to wrap up, we have worked really hard over the last year to develop the price cap that we think will deliver fair prices for consumers. It’s important temporary protection as we make the journey to a new digitised, data-rich energy future. We do recognise, however, that no matter how easy we make it to engage, there will always be some customers, particularly the vulnerable, who might struggle. As such, that’s why we have said that we are ready to introduce specific price protection for the most vulnerable after the wider price cap is withdrawn, if we think that is the right thing to do. Suppliers also have a key role to play to protect vulnerable customers and that’s why earlier this year we updated the standards of conduct in the licence and introduced a new overarching principle to require suppliers to pay special attention to customers in vulnerable circumstances, and to give them the extra help and support that they need to get good deals. It’s not an optional extra for energy companies to help their vulnerable customers; it’s a core part of their licence and we will take action against where suppliers don’t do that.
But for now, all customers on default tariffs whether in vulnerable circumstances or not can be confident that they are now paying a fair price for their energy, and that price is justified and based on the underlying cost of serving them.
So thank you for listening and I’ll be glad to take questions.
John Hall, JHEMA: I’m one of the customers who don’t switch. I don’t see the point. You get a good deal for six months and then you go back to where you were. But can you explain – this is a commodity market. You’re looking ahead. How do you know what the price is going to be? That’s what we do for a living, and we don’t know what the price is going to be or the use of system charge, or the environmental controls, so it’s quite difficult at the beginning of the year to know what the costs are going to be to set a cap. And you say you have a level of headroom but it’s a commodity market – how do you cope with that?
Rob Salter-Church: Yes, you are right – it is very difficult to make accurate forecasts. The 6 monthly resetting enables us to make use of the best available data. What we do for each of the components is use the latest available information so for example with wholesales costs, we look back to see what the costs were within an observation window for a supplier to buy 12 months’ worth of energy on a rolling basis, so the wholesale allowance is based on a forward forecast of what it is going to cost to buy 12 months’ worth of energy at the beginning of the period. Because we take that approach that enables us to provide what we consider to be a fairly accurate cost based on what suppliers could actually achieve with a hedge in the market to provide what their customers will use in the future, and the six monthly updating enables us to ensure that we are making use of the best available information.
John Hall: Is there a level of reconciliation if you get it wrong and suppliers end up out of pocket?
Rob Salter-Church: No. What we’ve done is to have headroom allowance which we are confident will provide sufficient space should things pan out differently. We will have an ongoing team that will monitor how the cap works in practice.
Chris Harris, Npower: You talked about the headroom and uncertainty. Of course there are really two components within headroom: 1) the ability to compete and 2) the uncertainty. I’m just thinking about the uncertainty element of it. It’s relatively narrow and there is quite a lot of uncertainty and I think you might agree that the volume of uncertainty is higher on a single-year basis. I understand the argument that over 7 years it pans out but of course it does give a supplier a cash problem. We’ve had the debate about the cap and it is what it is, and so thinking about future planning, one thing we are thinking hard about now is defaults by suppliers. We have some coming through now, some of which will require pretty immediate cash calls, and you get a bit of a cycling problem. I know you haven’t done recovery – the catch-up – at this time, but I wondered about other routes for default mechanisms etc., i.e. if there is some way to push those forward to avoid a cash problem where suppliers default and have to be mutualised, creating more supplier defaults. I accept that over the years it probably averages out but on a one-year basis you are giving suppliers quite a lot of problems. Was that question clear?
Rob Salter-Church: Yes, it is clear. There are requirements in the Act regarding a supplier’s ability to finance itself over a period of time, and you made a broader point around the specific uncertainty arising from suppliers not meeting their financial obligations and the associated costs of having to be mutualised across other suppliers. That’s one of the uncertainties that we have looked at, so in reaching our decision that the level of headroom was appropriate we took a broad look at a number of different things that might happen and formed a view of what might be the reasonable cost implications of that, including mutualisation of certain regulatory obligations, and we were confident that the level we set the cap at was going to be appropriate.
Steve Murray, Moneysupermarket.com: I’m interested to understand when the definition for “effective competition” will be released as it’s a key part of establishing whether the cap is performing or not.
Rob Salter-Church: So, it’s a really good question about how we will go about doing the assessment about what effective competition looks like. The approach we are going to take is to use our annual “State of the Market” report produced every Autumn, and we will use the 2019 version of that report to set out more detail about how we will undertake that assessment and then that will give us a good time by 2020 when we have to make our first recommendation to the Secretary of State about whether the cap should be extended. We’ve had some really helpful responses to our policy consultation in May and also our statutory consultation on how best to approach the question of what the effective conditions for competition look like, and we will be reviewing those in the coming months and will set out in the State of Market report how we will undertake that assessment. What I would say here is that it is as much looking at what the future might look like as opposed to observed levels of switching in the market underneath the price cap. So, you would expect within a price cap and indeed in our impact assessment we said that we expect there to be a dampening effect on the competition and on switching in the near term, so we don’t think it’s right to use solely observed levels of switching now as a way of thinking what a market might look like without a price cap. So we will have to look both at what is happening in the market today, and how confident do we feel about the rollout of smart metering and the implementation of the other reforms that I’ve talked about.
Julie Elliot: Can I just come back on something – you said you think it’s going to have a dampening effect on competition. Why would that be when most of the people that this affects are people who have never switched?
Rob Salter-Church: We’ve done a number of scenario analyses and hypothetical things that might happen. We know that one of the key drivers for customers to switch is how much they can save, and one of the things the cap will do is reduce the level of savings between somebody at the end of their fixed-term tariff deciding to find another fixed-term tariff, or just defaulting onto their supplier’s standard variable tariff. We expect that there may be some people who decide that, for example, although a previous £300 saving was enough to make them engage, a lower saving of £200 isn’t enough. What we’ve done in our assessments is take a relatively conservative assessment but we think we will see reductions because we will see a narrowing of the price differential. It’s one of the things that we will keep under review when assessing the impact of the cap on the market.
Caroline Atwell, Citizens Advice: One of the things we’re interested in is what protection for vulnerable customers might look like once the cap is lifted. You’ve mentioned that a specific price protection will be ready to go once the cap is lifted but I wondered what it will look like? Will it be similar to the safeguard tariff or were you referring to the data-matching powers? And just a second part – if the cap were to be removed as early as 2020 would the protection be ready to go from that point?
Rob Salter-Church: First of all just to clarify what I was articulating, which was a commitment from Ofgem to explore what type of protections would need to be in place flor vulnerable customers in time for the cap being lifted, as opposed to us already having designed anything. We recognise that it’s important to ensure that those customers who find it more difficult to engage have protection when the cap falls away and it’s something that we will be working on in the coming months and years to come.
Mark Todd, Energy Helpline: There is a general feeling that the level of the cap is too harsh and too far in advance. We are already seeing a halving of savings compared to what people were making last time. Also, setting the cap too far in advance doesn’t seem to me to be fair or sensible because the wholesale market changes quite rapidly and to set it many months in advance doesn’t seem to reflect reality. I’m interested in your opinion.
Rob Salter-Church: I think there are three points there: has the cap been set too low; the timeframe for it and also what is happening with wholesale costs and what that might do to the next level for April 2019. So taking them in turn, no, we don’t think the cap has been set too low. The cap requires us to protect customers on default deals. We’ve looked carefully at that and we are confident that we have set a cap that meets that objective. We have due regard for all of the matters that we were required to look at which I mentioned before: efficiency, incentive to switch, etc. so we are confident that we have set the cap at a level which provides appropriate protections.
Neither do I believe that the cap level has been set too far in advance. One of the challenges is providing suppliers with sufficient time in order for them to notify their customers of changes, so we’ve set something out that is what we consider to be an appropriate window in between setting the level of the cap and the new cap level coming into effect.
Regarding wholesale prices: yes, they have risen over the last 12 months by about 38% and what we signalled when we published our decision last week was that the level of the cap in April is likely to be higher than the level for the first period. Consumers will still be protected even if the cap increases. Because we’ve seen wholesale prices increase so sharply over the last 12 months, if there were no cap in place suppliers would have increased their default and standard variable tariffs anyway. What is the difference is that with the cap it means that prices will only ever increase by a justifiable amount that is based on the underlying costs of electricity and gas, and that was not the case previously: customers would not have had a transparent process or the confidence that prices would not increase by a larger amount than they need to. So, yes, the cap may go up or down but what customers should feel confident about is that the price they pay is a fair one that only reflects the underlying costs.
James Evans, Hudson Energy: I wanted to focus in on what you were saying about the conditions for the removal of the cap. One of the things that I think needs to be factored into that is a level playing field for all. Suppliers up to now have been constrained by the licence in such a way that they can’t bring in some of the innovative products and so on. You could characterise some of the new business models in such a way as “we would like to supply energy to customers but we don’t want to be bothered with all these protections that suppliers have to provide to consumers”. There are things like the auto-switching sites that don’t have to display the same level of information that suppliers have to, in terms of keeping their customers appropriately informed and you could argue that certain of the automatic switching sites at the moment are misinforming their customers in terms of the criteria they are using to select the suppliers that they automatically switch customers to. Also, with peer-to-peer trading, customers will still have to use the transmission and distribution networks, so do we need to move more towards using availability charging rather than commodity charging, as Laura Sandys has been talking about: access and availability pricing for distribution assets rather than charging per unit for transfer?
Rob Salter-Church: There are some big questions there. I think it’s really important that we remember that energy is an essential service and so there are certain customer protections that are absolutely non-negotiable, like for example treating vulnerable customers fairly and looking after them with extra help. One of the things that we will look at as we progress our review is what protections need to be in place for people who may use different parties to be their primary route to meet their energy needs. We don’t have all of the answers to that which is why we are undertaking this review and why we’re interested to hear from different stakeholders to get inputs on how we can ensure that we have a framework that enables innovation, that enables customers to make different choices, and respects the important aspects of energy as an essential service.
Esin Serin, The Energy Institute: Will the price cap reduce or delay suppliers’ ability to innovate?
Rob Salter-Church: We don’t think that the cap will block innovation or on suppliers trying to come up with new tariffs, products and services to engage customers, but we do recognise that there are certain constraints that the cap imposes. But what we’ve said clearly is that if suppliers want to come forward with a certain type of tariff, for example a tariff with a zero standing charge, then they should come and talk to us because we have the ability to offer certain derogations. So we are keen to engage with any supplier who might want to offer something that might look a bit different from the standard to see how that might be accommodated.
We’ve taken the same approach that we took with the prepayment meter cap in offering the facility for suppliers to come forward for derogations. We haven’t had any so you might infer that suppliers may not do that but given that the scale of this cap is 11m customers we think we might see a bit more of that than we have so far.
David Lewis: Is it possible for suppliers to say they don’t want to offer a default tariff?
Rob Salter-Church: No. Suppliers have a universal service obligation and they are required to have a tariff which complies with the level of the cap as a default.
Chris Harris, Npower: Thinking about the tariff end, the CMA formula was number of customers who could make a saving by switching times the differential between what they were on and what they could switch to, multiplied by some sort of demographic factor so therefore if who wasn’t switching was rich we wouldn’t have a policy problem or the need for a policy intervention. So focussing on that piece of it, and if we take the first two bits, which is number of people who aren’t switching and the differential on the table, is there a structural intervention to resolve the demographic issues, for example warm house discount, making a universalised levy raised to that, winter fuel payment etc. etc. Could we just re-cut our subsidies without causing a switching problem where people would lose their subsidy if they changed supplier? A socialised levy, or whatever we might call it, but is that one route out of it, to solve the demographic problem?
Rob Salter-Church: Again, quite big questions about whether the current structures and policies of Government that are delivered through energy suppliers, be it the warm homes discount, be it the energy efficiency schemes, are the right ones. The Government has recently looked at whether its approach is designed in the right way and has made some decisions to change the way those schemes work, and I think it’s for the Government to form a view rather than us as the Regulator. What we are putting in place in January is important protection for those who don’t switch, and that really is what our focus is on.
Charlotte Farmer, Cornwall Insight: I have a question about derogation. Have you not had any approaches from green suppliers?
Jemma Baker, Ofgem Head of Retail Price Regulation: We have consulted on whether we should allow renewable tariffs to be charged above the cap, and we decided that all tariffs had to comply with the cap. But what we did offer was a derogation process, so we said that suppliers can come to us on a case by case basis if they feel that their renewable tariff needs to charge above the cap. We set out three outcomes: 1) they must be able to prove that the customer has chosen that tariff; 2) that the tariff they are offering does materially contribute to renewable energy beyond existing subsidies; 3) that it does cost them materially to provide that renewable energy. So the derogation process went live last week when we issued our decision. We have had some approaches but it wouldn’t be appropriate for me to say how many or who, but I can say that that is an option that is available to suppliers.
Steve Murray, Moneysupermarket.com: Do Ofgem feel that they have taken over, for a short while, the pricing of default tariffs? And have the knowledge to do the calculation about where the next cap is going? Do Ofgem believe that they have a responsibility to communicate a direction of travel to make sure that customers are informed, thinking about this current window to communicate to those customers who have settled for a cap thinking it is a fair price, and they are currently in a price-rise window but they don’t know it?
Rob Salter-Church: We recognise that this is a big intervention in the market, setting a maximum price for some 11 million customers. One of the things we are looking at is how we can communicate the way the cap works to customers and how we can work with organisations such as Citizens Advice to help customers understand what it means for them. As to giving indication of what might happen in the future, I think we’ve done that in the way we announced last week our decision on the cap, so we’ve been very clear in all our communications that we are in a period of rising wholesale prices and that is likely to result in an increase in the cap for the next period. But I do think it is important to be really clear to customers that even if the price of the cap goes up, it will be done in a transparent way and customers are better off under that cap. And, importantly, wholesale prices do go down as well as up, and customers should be confident that when that happens the impact will be passed on to them in terms of bill reductions in a timely way, which hasn’t always been the case in the past.
Julie Elliot: Yes, often bills are quick to go up but slow to come down. In your model you are going to address that, are you?
Rob Salter-Church: Yes. It works in exactly the same way in both directions, and because we are resetting this cap every six months, the changes will be passed on in a timely way to customers.
Jemma Baker, Ofgem Head of Retail Price Regulation: It’s probably worth mentioning that we have done a lot of work on consumer-facing materials and we are partnering various organisations to get the message out there. We want to convey how the cap works in a consumer-friendly way.
Mark Todd, Energy Helpline: You said a moment ago that consumers will be better off under the cap, but that’s not true is it? The cap is effectively the worst price on the market so surely the message is “this cap is a bad price and you shouldn’t really be taking it” because there are so many cheaper options available. Shouldn’t that be the message from Ofgem?
Rob Salter-Church: The message is that customers are better off with a cap than without one but we have always been clear, and we will still give the same advice for customers that if you want to get the best price for your energy you should search around and switch because we are confident that during the period of the cap there will still be better deals out there.
James Evans, Hudson Energy: The new faster switching technology is going to cost suppliers millions of pounds but Ofgem has not included that cost in the cap calculations. Where does Ofgem expect suppliers to get that money from, especially those smaller suppliers who have less cash reserves?
Rob Salter-Church: Within any supplier’s operating cost, they will have to deal with a degree of regulatory change. We’ve looked at suppliers’ operating costs in 2017 and we’ve used that as a basis for the efficient benchmark. Within 2017, suppliers were dealing with a number of regulatory changes so we have taken as a given that they would have had certain costs with doing that. Therefore, when we cast forward with the cap our assessment was that there will always be a certain amount of regulatory changes with associated costs that suppliers will have to deal with, and that is in effect already baked-in within the cap. I’d go back to the point about headroom uncertainty: we recognise that in any given year there may be different things happening and that’s why we have the uncertainty allowance to cater for costs which may not have been foreseen, but there is an element of cost of regulatory changes already included in the cap calculation.
James Evans, Hudson Energy: Does that then bring with it an obligation on Ofgem to ensure that it is imposing the least-cost regulatory change?
Rob Salter-Church: We’ve got a duty to ensure we introduce regulatory change that works in the interests of the consumer and that will be the primary thing that we will be considering. Of course, we will try to do that in the lowest cost way possible because ultimately customers are the people who foot the bills for change. So we will be forming a view on what is the right balance of costs and benefits, and that may not necessarily be the absolute lowest-cost if there are more benefits to be had by spending a little more. We’ll be looking at what are the right things to do for customers with our regulatory changes.
Mark Todd, Energy Helpline: Is there a level of damage to competition that would mean that the cap would get withdrawn?
Rob Salter-Church: We’ve looked hard at all the matters that we have had to give consideration to within the bill, and indeed one of them was what might happen to competition. We will keep a review of what if the impact of the cap on customers and on the market. The decision around whether to remove the cap is focussed on conditions affecting competition in the future. If there were significant unforeseen issues that were causing customers detriment, we do have the ability to look again at our methodology, but given the work that we’ve done so far in designing the cap we don’t anticipate that being something that we have to do.
Mark Todd, Energy Helpline: So if a whole slew of small suppliers go bust in January or February because of the cap . . .
Rob Salter-Church: Supplier exit, if they are inefficient, is not necessarily a problem. It would be wrong to have the cap set at a level that meant that customers were paying more than they should in order to keep inefficient operators in the market. That would not be in customers’ interests. There may be events that happen and of course we will be diligent and have a look at what’s happening in the market and see whether we need to look at the cap again, but that’s not what we would expect to do based on the analysis we’ve done so far of what the potential impact of the cap will be.
Julie Elliot: I’d like to ask Mark what makes you think that is a possibility?
Mark Todd, Energy Helpline: Because quite a lot of small suppliers have gone bust already this year without the cap, and the cap’s been set using wholesale prices from the summer, and they are going to have to pay wholesale prices in the winter, which typically are higher, and so typically what happens is that suppliers go bust in the winter because they end up trading day-to-day, buying energy overnight to serve their customers and in the end they go bust.
Stephen Murray, Moneysupermarket.com: Ofgem itself said in its announcement last week that it expects switching levels to potentially go down by 33-50%, and the Energy UK metrics say that 50% of switching at the moment is going to small suppliers. If you drop the small suppliers’ market share and their volumes and couple that with having to buy at a higher price over the winter – that’s tough market conditions.
Rob Salter-Church: One of the things that I don’t disagree with there is the potential impact on competition. One of the important things to draw out in this discussion is the exposure that small suppliers have to customers on default and standard variable tariffs is very small. This means that they are likely to be relatively unaffected by the imposition of this cap because they don’t have very many customers on those types of tariff. So we have considered the impact of the wholesale window that we have chosen but we don’t consider that it will make a material change to the situation that small suppliers will find themselves in,
Charlotte Farmer, Cornwall Insight: Question about the review next year on the smart meter rollout costs.
Rob Salter-Church: There’s not really an update on how we will undertake the review but the reason we are having one is that there is a bit of uncertainty about the progress that suppliers are making with the rollout, and what some of the unit costs will be for installation. We’ve taken quite a prudent, conservative approach to smart meter allowance within the cap, using average costs for an efficient supplier rather than lower costs, but we thought it was right and proper to have a review of that in time for the third cap period to see whether things have changed or not.
Julie Elliot: Do you think that the twice yearly frequency is sufficient to smooth out any differences?
Rob Salter-Church: We’re confident that twice yearly is the right frequency to update the cap. We looked at whether a longer or a shorter interval would be better for consumers but we were conscious of the fact that people don’t like their bills to change too frequently as it makes it difficult to budget and longer periods place burdens on suppliers such as we discussed earlier. Longer periods also might mean bigger jumps, so we thought that six months was the right balance.
John Hall, JHEMA: So do you think that all this will make people like me switch?
Rob Salter- Church: The objective of the cap is not to increase switching – it is to provide backstop protection for those customers to stop them from being overcharged. It is our other initiatives which are designed to make it easier for customers to engage and I think we are optimistic about what the future might hold and I’d go back to some of the early successes we’ve seen, e.g. in that collective switch trial where we saw an 8-fold increase in customer engagement. I think that tells us that there are good reasons to be confident for the future.
John Hall, JHEMA: 25 years on since we started this, on the domestic market only 40% have actually switched.
Rob Salter- Church: More than 40% as it’s not actually static. All I would say is that we have a large programme of work that is designed to make it easier and tackle some of the barriers. There will also be all sorts of new technology and innovation to help customers relate to their energy in a different way and we are confident that the market could look quite different in a few years’ time.
After some further discussion, questions and comments, the meeting closed at 5.30 pm.