Utility Week

UTILITY Week 19th May 2017

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Policy & Regulation 10 | 19TH - 25TH MAY 2017 | UTILITY WEEK Lobby Policy / Budget / Brexit Policy & Regulation The Tory price cap Energy price regulation is now inevitable, whoever wins the election. But what form will it take and how long will it last? Utility Week reports. T heresa May has spoken. If there was any ambiguity over just what "tough" or "muscular" intervention in energy retail might mean from the Conservatives, it has been blown away. An energy price cap has now been explic- itly promised – and there's no harbour for the sector with the opposition. Labour would go further, capping bills at £1,000 per annum and re-introducing elements of nationalisa- tion across energy supply, distribution and even water. Inevitably, these manifesto commitments have sparked uproar in the energy indus- try. The Tory pledge in particular is felt by the business community as a betrayal of its traditionally pro-market ideology. Given the state of the polls in the lead-up to 8 June, it is also the commitment with the most chance of becoming a reality. But however outraged leaders may be, the time now is not for public indignation. It is for scenario planning and damage limitation. Doing this effectively relies on being able to answer three key questions. What will a price cap look like? When will it come into effect? And how long will it remain in place? Scant detail has yet been issued on the intended shape of the Conservative energy price cap – though a mooted methodology involving regulated differentials between the most and least expensive tariffs on the mar- ket now seems to have been dismissed. This leaves two headline options. A whole market cap on all standard variable tariffs (SVTs). Or an SVT cap only for parts of the market – for a broader spectrum of vulner- able customers than are currently protected by the prepayment meter cap. Both options come with a number of pos- sible delivery permutations, of which a flat rate cap – such as Labour's suggested limit of £1,000 for annual bills – or a "crawling peg" system emulating the current prepay meter cap are the most likely (see Nigel Hawkins' column, facing page). Both options come with potential unin- tended consequences for competition, which have been angrily outlined by chief execu- tives such as Iain Conn, who heads Centrica. "Re-regulating free markets will be watched closely in other sectors at a time we are preparing for Brexit," says Conn. "Price regulation will result in reduced competi- tion and choice, it will stifle innovation and potentially impact customer service. This will negatively impact consumers." Moneysupermarket.com's Stephen Mur- ray agrees. Writing for Utility Week, the switching site's energy specialist argues that a regulated price cap is "doomed" to fail in its "laudable" aim to cut bills (see column, p13). If forced to pick the lesser of two evils, however, retailers would be wise to advocate a targeted approach to capping – which Citi- zens Advice has campaigned in favour of for some time. More specifically, it has asked for a prepayment meter-style cap to be extended to all customers receiving the Warm Home Discount. Energy UK, representing a broad band of energy suppliers, seems now to also view this option as a best-case scenario in a bad environment. For the prime minister, siding with a par- tial market cap may run the risk of being "Price regulation will result in reduced com- petition and choice, it will stifle innovation and potentially impact customer service. This will negatively impact consumers." Iain Conn, chief executive, Centrica "The policy of the SVT price cap is entirely different from the price freeze principle. It will set a ceiling on retail prices based on underlying market condi- tions, allowing headroom for efficient companies to operate profitably." Stephen Fitzpatrick, chief executive, Ovo Energy

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