Utility Week

UTILITY WEEK | 22ND - 28TH FEBRUARY 2019 | 17 Policy & Regulation from Cornwall Insight show that almost half of the increase arising from the announce- ment could be erased in the October readjustment." This, of course, is an early forecast and assumes wholesale costs will remain at the same level seen in January. A key factor in the implementation of the cap was the perception that energy compa- nies, especially the larger retailers, may be profiteering from their most vulnerable cus- tomers. Yet even before the initial level of the cap – which was set at £1,137 – came into effect on 1 January this year, there had been mixed views on whether it really offers the best protection for consumers. Some commentators have pointed out that prices would have probably risen any- way, regardless of the cap, because of the rise in wholesale costs. Unsustainable business models SSE Energy Services' chief commercial officer Stephen Forbes warns of the danger that energy companies are running in offering unsustainable tariffs in a bid to attract thriŠy customers. "It's easy to set a low price if you're happy to run a loss-making business," he says. "We've seen all too oŠen the conse- quences of suppliers undercharging, offering loss-making tariffs that ultimately can't be sustained, leaving them in significant debt. And sadly, when these suppliers go out of business, it's the customers of more respon- sibly run suppliers who are leŠ to pick up the pieces." Forbes adds that the price cap rise shows that whoever sets energy prices – Ofgem, local authority suppliers or larger suppliers – there is no "magic formula" to control rising wholesale costs. And it's not just concerns about con- sumer protection that have been voiced; the cap has also already been blamed for trig- gering restructuring at more than one of the UK's largest energy retailers. Npower is the most recent supplier to blame job losses on the cap. At the end of January it announced that around 900 jobs would go as a result of "extremely tough UK retail energy market conditions". The big six supplier, which has a work- force of 6,300, has recently announced it is introducing a programme to reduce operat- ing costs, largely due to the price cap and intense competition on fixed price tariffs. Paul Coffey, Npower's chief executive, believes the energy retail market is "incred- ibly tough" and points out that the regula- tor itself forecasts that five of the big six will make a loss or less than normal profits this year due to the implementation of the cap. Like Forbes, Coffey warns that the recent failures of smaller energy suppliers are an indication that many have been pricing at levels which are not sustainable. However, in its announcement, Npower added that, as a result of natural wastage, the number of redundancies in the busi- ness will be "considerably lower" than the 900-strong cut to its workforce announced – around 900 employees leave the company annually, for retirement or another job. Citing an "increasingly competitive envi- ronment", fellow big six supplier Eon said in July 2018 that it was looking to reduce numbers across non-customer facing depart- ments as part of its ongoing efforts to trans- form how the business operates, improve efficiency and continue to innovate in the service that it offers customers. The energy price cap is a temporary meas- ure imposed by the government in response to concerns about "greedy" suppliers squeez- ing their customers for profit. Yet no-one can deny that the hike in wholesale costs leaves the regulator with no option but to raise the cap – and indeed for suppliers to raise their tariffs. At a time when companies are consid- ering cutting jobs to make ends meet, it does beg the question: is forcing suppliers to cap prices really the best idea? PRICE CAP BREAKDOWN source: Ofgem DEFAULT TARIFF PREPAYMENT METER PRICE £1,400 £1,200 £1,000 £800 £600 £400 £200 0 £1,400 £1,200 £1,000 £800 £600 £400 £200 0 n Wholesale costs n Network costs n Policy costs n Operating costs n EBIT n Indirect cost allowance n Prepayment uplift allowance n Payment method uplift allowance n Headroom allowance n VAT £447 £258 £137 £198 £20 £54 £12 £12 £31 £54 £521 £270 £151 £204 £22 £60 £12 £13 £34 £59 £1,137 £1,254 £1,136 £1,242 £421 £257 £134 £172 £67 £493 £271 £144 £174 £67 Winter 2018/19 Summer 2019 Winter 2018/19 Summer 2019 STANDARD VARIABLE TARIFF TREND source: Ofgem £1,250 £1,200 £1,150 £1,100 £1,050 £1,000 £950 £900 Apr 15 Oct 15 Apr 16 Oct 16 Apr 17 Oct 17 Apr 18 Oct 18 £1,047 £980 £959 £934 £1,011 £1,004 n Average standard variable tariff for the six large suppliers n Default tariff cap if applied before 1 January 2019 £1,074 £1,137

• Cover