Utility Week

16 | 22ND - 28TH FEBRUARY 2019 | UTILITY WEEK Policy & Regulation Analysis O n Thursday 7 February, the energy regulator announced the default price cap on standard variable tariffs is to rise by £117 to £1,254 a year, affecting around 11 million customers. The price cap for prepayment meter cus- tomers, meanwhile, will increase by £106 to £1,242 a year for the same period of a six- month "summer" price cap. The new levels will come into effect on 1 April and will be reviewed later in the year. At the time of writing, five of the largest energy suppliers – Eon, EDF, Npower, British Gas and Scottish Power – had all announced they would raise their default prices in line with the revised cap. We are told, by some, that customers are being protected and that a price cap means a better deal for society's most vulnerable. But is this a fair assumption? According to Ofgem, the caps will con- tinue to ensure that the 15 million house- holds protected "pay a fair price for their energy, because the rises announced reflect a genuine increase in underlying energy costs rather than supplier profiteering". Indeed, the regulator's chief executive Dermot Nolan, says: "Under the caps, house- holds on default tariffs are protected and will always pay a fair price for their energy, even though the levels will increase from 1 April. "We can assure these customers that they remain protected from being overcharged for their energy and that these increases are only due to actual rises in energy costs, rather than excess charges from supplier profiteering. Alongside the price caps, we are continuing to work with government and the industry to deliver a more competitive, fairer and smarter energy market that works for all consumers." A long-standing critic of the price cap is the chief executive of big six supplier Eon UK, Michael Lewis. Speaking at Utility Week Congress in Birmingham last October, Lewis said Eon had concerns that interven- ing in the market this way "brings the dan- ger" of reducing customer engagement and could "ultimately be counter productive" in driving forward the new energy agenda for customers. He added: "There are some important things that Ofgem needs to do in their con- sultations to make sure that the price cap is workable and doesn't have the negative effects we have talked about." According to Lewis, there are three impor- tant factors: wholesale costs, operational costs and headroom. 'A significant blow' The recent rise has also leœ some question- ing the level of the protection the cap pro- vides for customers. Stephen Murray, energy expert at price comparison website MoneySuperMarket, calls the cap increase a "significant blow" to millions of households relying on the cap to save them money. "The cap was put in place to protect consumers from overpaying on their energy, but right now it's doing any- thing but that," he says. "It's only taken five weeks for it all to unravel, and households up and down the country will be scratching their heads in confusion and wondering how the claims of 'fair prices' and '£76 per year saving' have disappeared – and so quickly. "The price cap was delivered against a market backdrop that was almost certain to wipe out the initial savings immediately, and that has proved to be the case. "The cap is determined by a number of external factors, such as the cost of buy- ing energy on the wholesale market, which means it can go up as well as down. All this provides scant protection for consumers, compared to the peace of mind of taking con- trol of your bills." Adam Scorer, chief executive of fuel pov- erty charity National Energy Action, is also concerned. He warns that the recent freezing weather, coupled with the likely energy com- pany responses to the higher caps, will have a "hugely damaging" impact on the most vulnerable in our society. "While Ofgem's caps are required to reflect the underlying costs of supplying energy, higher prices will inevitably pile yet more pressure on the mil- lions who have no choice but to suffer in cold and dangerous homes," he says. Figures published by Ofgem show how rising wholesale costs were the driving force behind the increase. Furthermore a certain Beast from the East caused high demand for gas last March. The industry regulator says that around £74 of the £117 increase in the default tariff cap is due to higher wholesale energy costs, which make up more than a third (£521) of the overall cap. Network costs account for the second biggest element of the overall cap (£270), while operating costs are responsible for £204. Higher wholesale energy costs have similarly pushed up the level of the prepay- ment meter cap, Ofgem says. Heading down again? Despite the significant rise, industry analysts are already predicting the cap will fall when it is updated in October. Research from analysts at Cornwall Insight suggests that, with wholesale cost pressures starting to fall, its predictions for winter 2019 indicate that the cap is likely to be reduced by around £50, assuming whole- sale costs remain at the same level the mar- ket experienced at the end of January. Robert Buckley, head of retail and rela- tionship development at Cornwall Insight, says: "The announcement comes as lit- tle surprise because built into the price cap design was the possibility of upwards movement in response to changing market conditions. Despite the upward movement in the cap, wholesale prices have been fall- ing recently and this could impact the next change to the cap. "Should such a trend continue, forecasts Is the energy price cap working for the market? Ofgem's price cap update has finally been announced, with many industry analysts proven right about an increase of £100 or more. As wholesale costs rise, Adam John asks: is the cap worth it?

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