Utility Week

UTILITY Week 14th July 2017

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24 | 14TH - 20TH JULY 2017 | UTILITY WEEK Customers Analysis E nergy utilities have got used to being in the last chance saloon ever since ex-Labour leader turned Radio 2 disc jockey Ed Miliband pledged in 2013 to freeze energy bills. And it looks like their stay will be extended aer Ofgem kick-started moves to introduce a limited cap on bills. The regulator has provided scant detail of how it is planning to respond to energy sec- retary Greg Clark's call for ideas on how to better safeguard vulnerable customers. How- ever, Ofgem chief executive Dermot Nolan has provided a few hints about how it might work, suggesting that the recently intro- duced cap on bills for customers on prepay- ment meters could be extended to everyone who qualifies for the Warm Home Discount. Ofgem will be holding a summit with con- sumer groups next week to discuss its next steps, which could take up to another year to be implemented depending on pushback from the industry. First Utility managing director Ed Kamm is frustrated that the debate about energy bills appears to have gone full circle from two- and-a-half years ago, when Ofgem referred the energy market to the Competition and Markets Authority. "We've had two elections and we're still in the same place," he says. The good news for the industry is that an across-the-board cap on household bills is off the table, for the time being at least. Energy investors expressed their relief aer Nolan's announcement and share prices rose. "Focusing on the vulnerable is the right starting point: it's the group that we should be most concerned about," says Kamm. Tim Ham, former head of pricing at Brit- ish Gas, agrees: "In a market where input costs are so variable, fixing price levels is extraordinarily risky, so as a general approach it's not great. You don't need to protect everyone because the market isn't functioning so badly and people aren't mak- ing excessive profits." Ham, who now runs his own consultancy, Pearson Ham, argues that it is right to target Warm Home Discount beneficiaries because this is the group most likely to have trouble paying their bills. "If we believe that we need to look aer the poor, this maintains an effective market while protecting the people that need pro- tecting, so it's quite a good balance." And Ryan Thomson – a partner at con- sultancy Baringa Partners – argues that a targeted cap can be implemented much more quickly than could a more broad brush one. The beauty of using an existing scheme is that the government has a record of who is eligible for the discount, he says. "Those customers are well defined and identifiable; applying a safeguarding tariff to that sub- group of customers is easier than trying to ring-fence another group of customers who haven't been identified. This appears to be a good solution. It provides protection specifi- cally where it's needed." Kamm agrees: "We know who are paying Warm Home Discount to and we can apply something to that group." Subsidising expensive tariffs Ofgem's intervention also starts to address what Kamm describes as a "crazy anomaly", under which Warm Home Discount custom- ers are effectively subsidised to stay on stand- ard tariffs that are poor value for money. "We are giving £140 off through the Warm Home Discount to that group, who are more likely to be on the standard variable tariff. As a society, we are saying this group needs help but they are more likely to be overpay- ing," he says, adding that Warm Home Dis- count customers should arguably be put on the cheapest tariff available. The flip side is that those who stand to benefit most from the targeted cap are the more affluent and tech-savvy custom- ers, who are likeliest to be signed up with smaller suppliers not obliged to contribute to the discount because they have fewer than 250,000 customers. Kamm says: "We have to solve the anom- aly that more well-off customers are the ones who are switching and they are more likely to be with small suppliers who are not paying into programmes like Warm Home Discount. It's a crazy situation where well-off people, who are more likely to switch, are not even contributing to the Warm Home Discount. It's a regressive tax: the people who are pay- ing for it are the people who can't afford it." However, from Ofgem's perspective, another big advantage of the more targeted cap is that it lessens the likelihood of a confrontation between regulator and indus- try. Opting for a market-wide cap could put Ofgem at loggerheads with the Competition and Markets Authority (CMA), which explic- itly ruled out such a move in its report on the energy market, published last summer. The consumer watchdog judged that the disad- vantages of a broad-brush cap outweighed the potential benefits. "They would have to take on the CMA and explain why they got it wrong, and that's not straightforward," says a senior regulatory source. Baringa's Thomson says Ofgem could also leave itself open to a legal challenge if it went against the CMA's recommendations. "Given that the CMA ultimately rejected the idea of a market-wide price cap, it would have been easy for suppliers to appeal back to the CMA without legislation." Added to which, Ofgem has a limited appetite for the kind of cap mooted by prime minister Theresa May in the run-up to the general election, says the senior indus- try source. "[Ofgem] has never shown any enthusiasm for imposing price controls and seemed perfectly content with the CMA's rejection of price controls on SVTs." By con- trast, he points out that the CMA's opposi- tion to the Warm Home Discount extension was rooted in the practicalities of the move, which makes it potentially easier to contest. So, should the energy companies take what's on offer from the regulator? Ham believes the mooted package could be suppliers' "best chance" of escaping a more swingeing price curb. "I would be jump- ing on these proposals as the solution and saying we need to protect the hard-up in society, because it's a lesser of many evils. If I was in an energy company, I would be doing what I could to make these proposals work." Thomson agrees: "It would be hard for the energy companies not to engage with this. It's aimed at the more vulnerable and The best remedy for energy? Ofgem has paved the way for a limited energy price cap for the most vulnerable customers in the market, but is this the best way to remedy consumer detriment? David Blackman investigates.

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