Utility Week

UTILITY WEEK | 14TH - 20TH SEPTEMBER 2018 | 7 News year. This compares with the average margin of 4.2 per cent or £50 per customer earned by large suppliers in 2017 and the £70-85 earned by the most profitable," Moody's says. It estimates that the default tariffs of the six large energy retailers will fall by an aver- age of £105 per year, slightly greater than the reduction of "as much as £100" promised by the prime minister in May 2017. All the large energy suppliers have increased their prices between April and July 2018, and all except SSE and Npower announced a further increase to take effect between August and October. Moody's points out companies are likely to respond to the default tariff cap by "increasing unregulated tariffs and accept- ing the associated loss of customers to inde- pendent suppliers, and by reducing costs". EDF says it plans to "work constructively with Ofgem" to identify any adjustments that might be needed to ensure the "cap is set appropriately". "The cap needs to reflect all the costs that companies face while preserving service and competition," the company says. Poisoned chalice Consumer champion Martin Lewis's main res- ervation is that a "fair" tariff is not the same as a "good" tariff. The founder of Money Sav- ing Expert says: "Ofgem has been brave, set- ting the price cap lower than expected. It will mean millions see a noticeable reduction in bills. Yet the regulator was given a poisoned chalice. It is calling this new tariff a 'fair' tariff, but that isn't the same as a good tariff. "The savings are still pitiful compared with the amount people would get if they switched and went to the market's cheapest providers – but there is a real concern the imposition of a cap will give people a false sense of security that doing nothing is fine." Mid-tier supplier Ovo is looking forward to the industry being able to focus on other matters once the price cap is in place. A spokesperson for the company says: "A price cap is the only solution that will protect cus- tomers and still allow innovative suppliers to compete. All energy companies should accept the need to reassure customers and restore trust in the energy market. "The sooner the cap is in place, the sooner the industry can move on and focus on utilising intelligent technology like home batteries and electric vehicles to transform the customer experience and cut emissions." Hayden Wood, co-founder of green energy company Bulb, adds: "It's good news the government is taking action and that prices will go down for millions of people. But even aer the cap comes into force, energy bills will still be too high." Temporary measure The level of the cap will be updated by Ofgem every April and October, to reflect the estimated costs of supplying energy. It is designed to be a temporary measure until 2023 at the latest. Ofgem says this will allow it to put further reforms in place to make the energy market "more competitive and work better for all consumers". Ofgem is aiming to confirm the cap level in November in time for the price cap to come in at the end of the year, subject to the statutory consultation process. The first update of the level of the price cap will be announced in February 2019 and come into effect in April 2019. It will then be updated every six months. The price cap is coming whether the industry likes it or not. The time for simply talking about it is almost over. MOODY'S ESTIMATE OF EBIT PER DUAL FUEL RESIDENTIAL CUSTOMER IN GB, 2014-17, AND PROFIT ELEMENT OF PROPOSED DEFAULT TARIFF CAP COMPARISON OF OFGEM'S EFFICIENT COST AND PROFIT MARGIN FOR SINGLE FUEL GAS AND CENTRICA'S RESIDENTIAL GAS SUPPLY SEGMENT Electricity Gas Combined (dual fuel) Profit element of default tariff cap Network cost Operating costs Fuel costs Policy costs Ebit Total costs Ebit per domestic customer Source: Moody's (companies' consolidated segmental statements, Ofgem, Moody's estimates) Source: Moody's (Ofgem default tariff cap model, Centrica consolidated segmental statements) 2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 2017 2014 2015 2016 2017 Innogy EDF Scottish Power Eon Centrica SSE Note: Cost categories may not be directly comparable Ofgem Centrica to 3/15 to 3/16 to 3/17 to 3/18 £100 £80 £60 £40 £20 0 -£20 -£40 -£60 -£80 £600 £500 £400 £300 £200 £100 0

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