Utility Week

12 | 23RD FEBRUARY - 1ST MARCH 2018 | UTILITY WEEK Policy & Regulation Analysis O fgem will have its work cut out when it turns to the task of setting the mooted cap on household energy bills. That's the verdict of the Business, Energy and Industrial Strategy (BEIS) select committee, which last week published its report into the dra legislation that is designed to equip the energy regulator with the powers to cap all standard variable and default tariffs. The committee was asked by Greg Clark, secretary of state for BEIS, to scrutinise the legislation aer it was published last autumn. The dra bill sets five tests for Ofgem to bear in mind when framing the cap. These are: protecting customers against excessive fuel bills; giving suppliers incentives to become more efficient; ensuring companies can secure sufficient finance; enabling effective competition; and providing incentives to switch. Former energy and climate change com- mittee chair Tim Yeo's assessment of the five tests is blunt. "Some of these are in conflict with each other so they can't do them all," he says. The committee's verdict is that meeting the first three tests, based on experience of how the cap works in Northern Ireland, will be "possible, if challenging". Northern Ireland's experience is not necessarily the best guide, cautions Ryan Thomson, partner at consultancy Baringa Partners. "Northern Ireland is slightly different in that have you have one incumbent and a few new entrants trying to win business," he says, adding that the market is "a lot more dynamic" on the UK mainland. However, meeting the switching objec- tive may be more problematic, points out the report, given that the introduction of a cap is likely to reduce the incentive for custom- ers to seek out a new deal. "Switching rates may go down, at least at first, as a result of the cap being introduced." And defining an "efficient" supplier is potentially a legal minefield, argues the committee. Pointing to past accusations that both Ofgem and the Competition and Markets Authority have miscalculated suppliers' costs, a too explicit definition of "effective competition" risks opening up opportunities for judicial review by suppliers struggling to adapt to the new regime. Efficiency is a slippery concept to measure too, says one Utility Week source: "Everything else is pretty easily measurable in terms of wholesale prices, rolling hedges and network charges, but understanding what an efficient supplier is and the amount of headroom they require will be challenging." While arguing that the five tests are "not incompatible", the committee acknowledges they are "challenging and may not all be achievable at once". Therefore, it suggests, ministers should make a choice about what Ofgem's priorities should be. In order to guard against potential legal challenges, the committee recommends that the bill should be clarified so Ofgem is not required to meet all five tests when setting a cap. The committee says the priorities when setting the cap should be consistent with the bill's main aim, which is to reduce overcharging rather than increasing switching. The committee's report also points towards Ofgem taking a much more hands-on role in the market. Throughout the price cap furore, it says, Ofgem has "failed" customers by being "overly cautious and reactive". The MPs are "unconvinced" by Ofgem's argument that it required primary legislation to set a market-wide cap, adding that the risk of legal challenges should not have been a deterrent to implementing policies in line with its statutory duties to protect consumers' interests. Specifically, it says the regulator should have acted sooner to remove suppliers' obligation to move customers at the end of their fixed-term contracts on to default tariffs. In the future, the committee urges the regulator to be "faster and more proactive" in using its "extensive powers" to protect customers against overcharging. And while the MPs want Ofgem to continue its efforts to promote customer engagement, they are sceptical about relying on this to deliver more switching, and hence effective competition. The report also marks a further breakdown in the pro-smart meter consensus that has prevailed in Westminster since the then energy secretary Ed Miliband mooted their introduction nearly a decade ago. Given the "slim" evidence that smart meters have a substantial impact on cus- tomer switching rates, the MPs conclude that it would be "unwise" to rely solely on the rollout of the devices to maintain effec- tive competition in the market once the cap is lied. The report is particularly sniffy about the chances of engaging lower income households, who are disproportionately on default tariffs, once they have smart meters. Thomson believes there are question marks over whether smaller suppliers will be able to remain under the price cap and remain in business, given their greater vul- nerability to sudden shis in the whole- sale price. It all adds up to what sounds like a recommendation for a subtle shi in Ofgem's remit. "It almost changes the primary purpose in terms of consumer protection through avoidance of overcharging rather than through promotion of competition," says Thomson. For Yeo, the shi away from competition reflects the "short-term, rather muddled approach", which has led to the cap being introduced in the first place. "If you want energy companies to stay in business, trying to control prices isn't the best to way to achieve it. "You will get better results by making competition work better rather than by con- trolling prices: competition is always the best spur to keep prices down," he adds. "Compa- nies will always find a way to game a system that involves price caps. "It reflects rather superficial thinking from the government to assuage some populist concerns. We've lacked for some time any long-term strategy in energy policy, which is that we need more investment." Price cap paradoxes Capping default tariffs sounds like it ought to be straightforward, but a BEIS committee scrutinising the proposed legislation has found it is anything but. David Blackman reports.

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