Utility Week

18 | 10TH - 16TH JANUARY 2020 | UTILITY WEEK Policy & Regulation T he price cap has certainly caused a stir in the energy market and has been blamed for denting supplier profits. Yet despite industry expectations, it has yet to dampen energy switching. This week marks one year since the default price cap was introduced to the energy retail market. A legacy of Theresa May's turbulent tenure in Downing Street, the measure is designed to protect the estimated 11 million energy customers who have never switched supplier. Already we have seen the cap revised twice to keep it in line with wholesale gas and electricity costs, and the next adjust- ment is expected in early February. So a-er 12 months what, if any, changes have we seen in the market in response? One industry expert argues that the cap was introduced as a way of taking money away from suppliers. It would seem the larger players concur, because many have blamed it for hitting their profitability. Martin Price, a retail energy director with Baringa Partners, says the government's stance to Ofgem was that some companies were profiting from a lack of engagement. "The government instruction and posi- tioning to Ofgem was that some companies are not sufficiently efficient and that they were making money off the back of custom- ers who hadn't engaged in the market and therefore hadn't switched. "Ofgem's methodology was to fund on the basis of an efficient operation, so that non- switching [default tariff] customers wouldn't be overpaying for their fuel. "This has effectively taken a chunk of money out of the market because many com- panies weren't able to become sufficiently more efficient that rapidly, therefore making either less profit or making a loss. So to an extent, you can understand why companies would blame the price cap for their making less money, because in part that is what it was designed to do. "I guess there's a challenge, certainly for the big six companies, to rapidly become more efficient and catch up with the allow- ance in the price cap. That's a tough ask of any organisation and you can arguably say they would have probably been trying to do that anyway." Switching holding firm A reduction in the number of customers switching supplier was widely expected fol- lowing the cap's introduction, but this never materialised. In fact, switching has been increasing and 2019 looks set to be another record year, with 2018's total of 5.8 million switches being achieved by November. Lakis Athanasiou, utilities analyst at Agency Partners LLP, says "in theory" a price cap should massively dampen down switch- ing because it forces narrower differentials in tariff offerings. "In 2019 this dampening did not come about because wholesale prices moved below those set by the tariff cap, allowing significant undercutting. "Over this past summer, the wholesale price for an annual contract was around 25 per cent below the tariff cap equivalent, due to the collapse in global gas prices, with excess LNG [liquefied natural gas. This allowed around 10 per cent margin discounting. "In practice, discounting relating to wholesale prices could have been even higher, with some of the discounters just focusing on near term prices – that is, sum- mer only, rather than a one year lookahead – leading to even greater discounting. "This led to intense competition and high switching over the past summer." Despite the increased switching numbers, one industry voice takes the opposite view and instead believes switching was ham- pered by the cap. Peter Earl, head of energy at Compare- themarket.com, says the increase in switch- ing last year was largely down to the period Energy price cap marks first birthday One year in, Adam John looks at the effect of the retail market default cap and what a new government might mean for its future. Analysis between the announcement of the price cap increase and its implementation in April. "Although the published data from Energy UK suggests it will be a record year for switching volumes, it seems like there is an increase but probably that has been sup- pressed, in our view by things like the cap. "Many customers who are aware the cap is in place on SVTs [standard variable tariffs] have sat and done nothing when arguably they could have shopped around and found something better. "The message here is a bit mixed, depending on whether the price cap level goes up or down and how the market treats and communicates that. In October, the cap level was reduced and there wasn't the same hive of activity around in the months prior to the cap being in place. "I think the balance of the year will show there has been a slight increase year on year in switching activity, driven primarily in the months February to March. And that's driven almost the entire growth volume for the year." Energy UK's figures do show a high amount of switching around the time Ofgem announced the increase in the cap level. For example, in February 453,000 switched, increasing to 615,500 in March and peaking at more than 668,000 in April last year – up by 34 per cent on the previous April and the highest number ever recorded. In May, the figures fell to 487,000 – a decrease of almost 30 per cent on the previ- ous month. Following the decline in May, Energy UK's statistics (see graph on facing page) show that switching rates never reached the same peak as earlier in the year. While Earl argues that the cap hindered switching, Ofgem's own data highlights how consumers had a low awareness of the price cap in the first quarter of the year, which sug- gests this may not be the case. According to the regulator's quarterly consumer perception survey for Q1 2019 (see facing page), only a quarter of consumers were aware of the cap, while 19 per cent said they had an informed awareness of it. Furthermore, switching has grown year on year, which may even be an indication of a developing habit among energy consum- ers. In 2015, 3.8 million customers switched electricity supplier; in 2018 the figure was 5.8 million and this will turn out to have been surpassed in 2019. All better now? So as we begin 2020, what next for the price cap? As the law stands, the price cap will end

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