Parliament is set to introduce new legislation in time for next winter, which will protect 11 million households from paying extortionate rates for energy by introducing an energy tariff cap on supplier’s standard variable tariffs.
The law, which is expected to be passed on Monday, will give government regulator Ofgem more power to cap the prices that energy suppliers charge to customers on their standard variable tariffs. These are almost always the most expensive tariffs that suppliers will offer, and it is no coincidence that these alone contributed towards profits of £1.4 billion for energy companies in 2016.
What is a standard variable tariff?
This is the default tariff that customers are automatically transferred to when either their current fixed-rate tariff has ended or when they move into a new property and are yet to change provider from the previous occupant. They have no end date, and customers will typically save 30% on their energy bills by switching from a standard variable tariff to a cheaper fixed-rate tariff.
However, despite organisations such as Money Saving Expert and even Ofgem themselves trying to make consumers aware of the savings that could be made, 11 million households still remain on energy provider’s most expensive tariffs. The cap will not directly save those households money, rather just limit the amount they may pay in the future if they do not switch.
So in spite of these recent government actions, switching is still highly recommended. It is worth noting that green energy providers may be exempt from this cap, with green energy tariffs usually more expensive anyway. Providers must prove, however, that they support the production of renewable energy to be exempt.
What actually is the price cap?
The price cap will be in place until at least 2020, meaning energy providers cannot charge more than £1000 per annum for customers on their standard variable tariff. From then onwards, Ofgem will review whether the cap should be continued each year up until 2023, and will also consider whether the cap should be changed every six months.
The bill has not come without controversy. Some providers argue that this price cap will hinder competition within the energy market. With an upper limit to the prices that they can charge, undoubtedly, every provider will have a similar (if not exact) rate for their standard variable tariffs. In theory, to maximise the amount they can earn from those on these tariffs, all suppliers will charge the maximum they are allowed to, leaving no room to undercut.
This then brings about the issue of those providers offering a cheaper standard variable tariff than other providers, as they may now just choose to raise their tariff price to the limit. So, what on paper should cap the most expensive tariffs may inadvertently raise the price of the cheaper standard variable tariffs.
Shadow business secretary Rebecca Long-Bailey also commented regarding the ‘spiralling’ energy prices many consumers have felt the brunt of the past year, blaming this on the government for not implementing this cap sooner.
‘Energy costs are spiralling out of control, and four million households live in fuel poverty.
‘The government must act to urgently fix our broken energy market.’
Clearly, it is a case of too little too late for some. The time it has taken the government to implement the cap brings into question their willingness to pass such a law. Long-Bailey’s view is shared by some on Twitter, a platform notorious for people not holding opinions back.
And when she promises it again (which she will) media will give it the same (positive) coverage they gave it the five times previously
— @1HardBoiledEgg (@1HardBoiledEgg) February 26, 2018
Caps never work either for an upper limit or lower limit. Take University Fees when raised to £9k for the top courses. It was a rush to £9k even for Micky Mouse courses. All bills will now just reflect the top permitted.
— OutsideTheVillage – Conservative But Homeless (@OTVDesk) February 26, 2018
— Rick Harris (@LongWordMonthly) February 26, 2018
What impact will the price cap have on consumers?
Although on the surface the introduction of this legislation seems positive, it may come with a worrying backlash from providers. British Gas claimed that in anticipation of the imminent cap, thousands of their staff lost their jobs, but in terms of the consumer prices will not change.
Remaining on the standard variable tariff will still cost consumers a lot more than if they were to switch, but this cap will simply stop their suppliers from further exploiting them. In order to counteract the potential fall in profit rate, suppliers may also hike up the prices of some of their other tariffs. So despite its seemingly good intentions, the bill may have an overall negative impact for consumers.
Long-term future for the energy market?
This legislation will not lower energy prices, but the principle of Ofgem capping the tariffs may symbolise a shift in power. With the government imposing the greatest intervention into the market since its privatisation, this demonstrates a willingness to flex their muscle and help consumers avoid exploitation.
So effectively, it may be the hit on the wrists that the energy suppliers need to provide better rates and to work more towards the interest of the consumer – in fear of further limitations being imposed in the future.
If you are one of the 11 million households who is suffering on a standard variable tariff, don’t hesitate to get in touch. Our free service can have you switched provider in one quick call. Fill in the form below to get started.