Utility Week

UTILITY WEEK | 21ST - 27TH SEPTEMBER 2018 | 11 Policy & Regulation "The industry must continue to focus on improving the service provided to all customers" W ith Ofgem having announced the proposed level of the default tariff price control, suppliers now have an indication of what they have to deal with in the post-cap world. However, there remain huge challenges and uncertainties in complying with a new price control for 11 million households We now have more than 70 suppli- ers in the domestic retail market that will be examining the details of the cap to see how it affects them. No two companies, or their customer bases and respective costs to serve, are the same, and each will be affected dif- ferently. Many will have to look hard at how they adjust, especially during a period of sustained high wholesale costs. As they consider their response to Ofgem's proposals, suppliers will be looking closely at issues like the approach to wholesale costs, the allocation of smart meter costs and the "headroom" intended to ensure effective competition operates under the cap. Such adjustments and actions are not without consequences for compa- nies, and indeed the sector as a whole. The challenge for suppliers will be to make their operations as efficient as possible without affecting the quality of their service or their ability to invest in innovation and improvement. All of this at a time when a rapidly changing market with more suppliers and more switching means tough competition to win and retain customers, not to mention other uncertainties like Brexit and costs outside of suppliers' control – and indeed the possible impact of the cap on switching, with Ofgem's own impact assessment warning of a reduction resulting from the cap. One beneficial side effect of the cap process might be some greater transparency around the costs that suppliers face – nearly 80 per cent of which are out of their direct control. That wouldn't in itself be a bad thing, although it's likely to show the con- tinuing effect of rising wholesale costs, which have been the major factor in price rises across the market this year. The cap will have to accommodate such rises so we need to focus on the other ways we can keep costs down for consumers. There is an ever-growing appreciation that a comprehensive efficiency programme will be the most effective way to keep bills down for customers in the long term. Smart meters offer the opportunity to keep bills down, not just by giving consum- ers greater awareness and control of their usage, but through opening the door to greater flexibility with products and tariffs. Upstream, we must ensure that the cheapest sources of power that customers use are not excluded and deliver the smart grid to ensure future investment across the value chain is as cost effective as possible. Most importantly, irrespective of the cap, the industry must continue to focus on improving service for all customers. Despite progress in recent times, there is still much work needed to engage better with customers and help ensure that everyone, no matter what their situation, has access to a fair deal and is able to take advan- tage of technological advances that enhance our services. Central to the goal of a universally functioning and socially responsible market is that we go further in our ongoing efforts to support and help vulnerable customers – those for whom engaging in the market and benefitting from all the innovation and advances that could be on offer provides more of a challenge. That's why we launched the independent Commission on Customers in Vulner- able Circumstances earlier this year. The post-price cap world will provide both a challenge and an opportunity for suppliers, but the goal remains the same – to keeping striving for an energy market that works well for customers, no matter what their circumstances. Opinion Lawrence Slade Chief executive, Energy UK lenger supplier Octopus, believes the meth- odology is still "much too generous" for inefficient suppliers, giving as an example this headroom allowance. "There is lots of room for companies to be more efficient than the cap suggests," he says. Robert Buckley, head of retail at Cornwall Insight, disagrees. He says the consultan- cy's cap tracker, launched in early August, estimated that it would be set at £1,150 per annum, £14 more than the figure spat out by Ofgem. He doesn't expect to see the regulator sig- nificantly shi ground now on the proposals outlined in the consultation paper. The introduction of the price cap will increase pressure on relatively small new entrants, says Jackson, who argues there will be less incentive for companies to run what he describes as "crazy loss-leader pricing". "Fixed price deals for new customers are hugely loss-making. Lots of people saw it as an opportunity to get rich quick but competi- tion for customers is so brutal that they are looking for an escape route." This could create scope for further consol- idation at the lower end of the market, says utilities sector analyst and Utility Week cor- respondent Nigel Hawkins. He says the problems of those companies already struggling will intensify as wholesale prices go up: "We may end up with a few suppliers. The smaller end of the market may see some consolidation." Overall, though, Jackson believes the cap will prove to be a bit of a damp squib. "The numbers on default tariffs will con- tinue to drop but not by a lot. Fewer people will be on default tariffs but not that much fewer. It won't have a massive impact. "We won't see as much change as we would have hoped." Cornwall estimated last month that the electricity element of the safeguard cap alone, which mirrors the broader level of SVTs, is due to increase by £53 to £650 by next summer, which would wipe out much of the hoped-for savings from the tariff. The consultancy was updating these forecasts when Utility Week went to press. Hard-pressed consumers expecting to see actual reductions in their energy bills are likely therefore to be disappointed. "Bills are going to be higher than they were before, which surely will be a political risk," says Jackson. "It won't defuse the arguments around the general level of energy bills," says Buckley. The worry for utilities is that rather than quelling the disquiet about energy prices, it will merely be a preamble to an even more fundamental reordering of the market.

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