Utility Week

UTILITY WEEK | 11TH -17TH JANUARY 2019 | 7 News Will the price cap fit? N ow this is a test. A real test." So said the late Graham Taylor in a famously uncompromising doc- umentary showing England's ill-fated attempt to qualify for the 1994 World Cup as his charges fell 2-0 behind to Norway. The title of that documentary – An Impossible Job – might over- state the challenge energy suppliers face, but testing times are certainly what confronts many of them right now, with the government's default tariff cap in force in an already tough environment, featuring wholesale costs which, until recently, have been rising steeply and a highly competitive marketplace. Indeed, there have already been indications of the unintended conse- quences some – including ourselves – have previously warned could result from the cap. Last year saw eight suppliers exit the market altogether – in addition to those acquired by other providers – many of them citing price caps as a contributory factor. While we mustn't forget the benefits for consumers that competition and the expanded number of suppliers have brought – a number of whom are fast becoming trusted brands with strong finan- cial backing – the spike in failures has forced an overdue look as to whether all those companies enter- ing and operating in the market are fully equipped to be sustainable and customer focused businesses in an increasingly difficult climate. The supplier of last resort process, while providing continuity and reas- surance for customers, is being acti- vated more frequently than its name suggests. The resulting costs of this is adding to the industry's (and custom- ers') burden – in the wake of similar concerns over Renewables Obligation payment mutualisation where the shortfall totalled £58.6 million. This is another clear indication of the finan- cial challenges within the sector. It also highlights the moral hazard, with suppliers footing the bill for what they might see as others' imprudence. While commentators have been anticipating a narrowing of price dif- ferentials as a result of a cap, it's not possible to identify whether this has happened because prices are rising anyway given that wholesale costs rose by at least 30 per cent over the past year (and nearly 80 per cent of all costs are out of suppliers' control). It remains to be seen what 2019 will look like – in particular if switching levels, currently at record levels, are affected by the cap or if the struggles being experienced by some suppliers damage confidence in the market. It's been well flagged that the cap will most likely have to rise in April – and despite the fact that this shouldn't come as a surprise, the reaction to that news is likely to renew the focus on how else to keep bills down for customers over the long term. Yes, supplier efficiency is part of this but so is ensuring our homes and businesses are as energy efficient as possible. Of course, it's not the same for every supplier – they each have dif- ferent business models, efficiency levels, costs (both current and legacy) and customer bases. Incentivising efficiency, as this increasingly com- petitive market has already done, is a good thing. But the challenge for the cap is how to allocate uniform costs while also recognising, for example, that consumers are not homogenous and the cost to serve differs a lot. It's got to allow the whole market to be operable, which means not just surviving but being able to continue investing (and attracting investment). Customers, especially those in vul- nerable situations, must be able to get a fair deal but we also need the indus- try to be able to finance its activities. If it can't do that, then customers and ultimately the whole market will lose out. Squaring that circle might not be an impossible job, but it's certainly a test for all concerned – the next year will show how everyone fares. Opinion Laurence Slade Chief executive, Energy UK the falling number of bargain basement tar- iffs on offer. Robert Buckley, head of retail at consul- tancy Cornwall Insight, agrees. "Those deals would have gone up anyway," he says. However, Jackson strikes a positive note about the prospects for switching, observing that in the few days since the cap came into force, its rate of customer acquisition has held up. The last set of Energy UK switching sta- tistics, published in November, showed engagement still on the rise. And the next set of figures, which will cover the month of December when levels of switching are historically low because of Christmas, will offer few pointers, believes Buckley. Jackson argues that the publicity sur- rounding the cap's introduction can only fuel SVT customers' appetite for getting bet- ter value for money energy deals, comparing them to workers earning the minimum wage. "They may know they are not being exploited but they also know they can do a lot better. We will make sure that people know at the level of the price cap that they can do a lot better. "Without customers switching we wouldn't have a business and yet almost every reputable energy challenger supports the price cap because we know the use of dodgy 'tease and squeeze' deals hides which companies are efficient and which are not "The price cap restores some sanity to the energy market. They [customers] finally know they are not going to get ripped off: they can engage safely in the market and can see which companies are actually efficient and which one previously relied on dodgy tactics to win new customers." However, the cash relief for customers could be relatively short-lived with an update of the level of the cap due in February. This figure, which will then fix the cap for the six months beginning in April, will be informed by the level of wholesale market prices between August and January. Cornwall's SVT cap tracker, which esti- mates the level that Ofgem will set based on the regulator's own stated methodology, spat out its latest forecast in November. This calculation, which included Octo- ber's spike in wholesale prices, indicated that the level of the cap could increase by up to 10 per cent when it is next updated in Feb- ruary, says Buckley. Prices have subsequently fallen back again, suggesting that the increase may not be as substantial. Nevertheless, for energy customers, it may not take long for the New Year price cap cheer to rub off. "

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