Utility Week

6 | 11TH -17TH JANUARY 2019 | UTILITY WEEK News Inside story F or most of us, January is an anxious time for scanning credit card state- ments as the consequences of seasonal spending come home to roost. However households have been offered one source of relief in the form of the price cap on energy standard variable tar- iffs (SVTs), which came into force on New Year's Day. Under the cap, the typical SVT dual fuel customer will pay no more than £1,137 per year. The exact sums paid by the approxi- mately 11 million customers who are on SVTs or other default tariffs will continue to vary, though, because actual bills will continue to reflect the amount of gas and electricity used. However, Ofgem reckons that the average saving will work out at around £75 for house- holds over the course of a year. The ire driving the introduction of the price cap was clearly targeted at the big six with their substantial back books of SVT cus- tomers inherited from the days of regional supply monopolies. However, the finances of these largest energy companies will remain "relatively robust", reckons Nigel Hawkins, utilities sec- tor analyst at Hardman & Co and a business correspondent for Utility Week. "If you are one of the big six you have other fish to fry," he says, explaining that the large and diversified nature of these compa- nies means they oen have more pressing issues to deal with. Greg Jackson, chief executive of chal- lenger supplier Octopus, is sceptical about SSE's claim that the price cap was a key fac- tor behind the abandonment of its mooted tie-up with Npower. "The price cap was announced many months before the price cap went ahead, so one would imagine their advisory teams were aware of the price cap long before." Efficient suppliers are able to make money by setting tariffs at levels "way below" the price cap, he says. "It's been set at a level that is entirely deliverable by effi- cient energy companies." He continues: "While in the short run a lot of inefficient energy companies will be complaining about the effects of the price cap, the reality is that if we have an industry less focused on exploiting disengaged cus- tomers, we will have an industry that is more trusted. "There is no need for a company to have prices as high as the cap if they are efficient. It encourages companies to finally get efficient rather than overcharge their customers." Jackson estimates that around £1,000 is the cut-off point at which suppliers should be able to offer a tariff without losing money. Smaller companies will be under pres- sure to axe their most cut-price deals, which many have used to lure customers away from more established competitors, says Hawkins. It would make sense for such suppliers to allow prices to dri up nearer to the cap level and use their existing customer bases to boost balance sheets. He says: "I would get a bit more market share if I can and see how it pans out over the next year." And the cheapest deals are already dis- appearing. The number of those lower than £1,000 a year plummeted by 90 per cent dur- ing the course of 2017, according to Which? The consumer group published figures in the run-up to the price cap's introduction last week that showed just eight of these cheap- est energy deals were still on offer. Alex Neill, Which? managing director of home products and services, argues that the drying up of these cheapest deals reinforces the need for a more fundamental reform of the energy supply market than the cap. But Hawkins believes that rising whole- sale energy prices have probably been a more important factor than the price cap in New year, new price cap The long-awaited energy price cap came into effect on 1 January, but many argue that it shouldn't bother efficient energy companies and may bolster market confidence. By David Blackman. £137 £54 Wholesale energy costs Policy costs VAT £258 Network costs Payment method uplift allowance Headroom allowance Earnings before interest & taxes £12 £12 £20 Total typical annual household energy bill on direct debit with the price cap (dual fuel): £1,137 £198 Operating costs £447 How will the default tariff energy price cap benefit GB energy consumers? We estimate 11 million customers on standard variable and default tariffs are protected Around £1 billion total estimated savings for consumers 11million £120 £1 billion How this breaks down It pays to shop around... Price caps give peace of mind that you're paying a fairer price based on the costs to get energy to you. Even greater savings are to be had if you switch... £921 Cheapest market tariff at 28 September 2018 compared to The default tariff cap level from 1 January 2019 (average) £1,137 Prices reflect a customer paying by direct debit, with typical energy use. Difference ...by the costs that make up your bill Over £120 estimated annual savings (average) for a typical consumer on the most expensive standard variable tariff £216 *Average cap savings are calculated by comparing a weighted average standard variable tariff to a weighted average cap level (at November 2018) for a standard variable tariff Average cap saving* £76 source: Ofgem, November 2018

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