Ofgem price cap

What do people think of the proposed Ofgem price cap? I was in favour of the idea previously, but the actual plans the Government have now released seem to make a confusing mish-mash that could both disencourage switching and stifle competition.

Obviously it will deal with the most expensive tariffs, but bad firms will likely just put up the cost of the cheaper tariffs available to compensate, and consumers who are already wary of switching, including vulnerable groups, may wrongly think they don’t need to switch to save money because the Government has taken action.

The energy supply & distribution industry is a business not a charity, and businesses have a fiduciary duty to their shareholders including maximising profits. If the government wants to get involved, it should limit it’s actions to ensuring that the marketplace is competitive rather than meddling with the market price.

Politicians have a poor record when it comes to business, and I can see this costing everybody more in the long run. Ed Miliband’s manifesto pledge to limit price increases cost us all an extra £50 because the industry kept tariffs unnecessarily high fearing that they wouldn’t be allowed to increase them if Labour won the election.

I wonder if the price cap will cover the standing charge because that’s an area that could be used to recoup any price reductions?

We’re still in favour of a price cap. From our experience, there are two groups of energy switchers:

  • people you switch every year to the cheapest tariff every for a relatively small saving
  • people who never switch

This price cap will help the second group of people, most of whom are on Big Six standard tariffs. But the Big Six will struggle with this, they will have to become more efficient, find money elsewhere, or leave the market. This might mean that the Big Six increase their fixed price tariffs, but they can’t raise them too far, or they simply won’t compete with the little companies like us. We wouldn’t be surprised to see a Big Six company decide to leave the market. Which wouldn’t necessarily be a bad thing. It would prove that the market is competing. It’s worth pointing out that, currently, the cheapest Big Six tariff is already about £128 more expensive that the cheapest tariff. They’re simply not competitive.

What would this mean for other suppliers? We have absolutely no plans to raise our tariff if a price cap were to be introduced. And we’re one of the most competitive tariffs out there. We’ll stick to our Pricing Principles which state we’ll drop our prices if we can save members £20, and only increase them if wholesale prices force us to.

And we don’t expect the rock-bottom discount suppliers to increase their prices either. They’re in a race to the absolute bottom and are sacrificing everything on their way to get there. Some of these tariffs are loss leaders, so those might disappear if their standard tariffs are capped, but not all of them are. In fact, the very cheapest tariff on the market is an SVT. Plus, these changes are likely to be dwarfed by the new Price Comparison Website rules that are being consulted on at the moment. If PCWs no longer have to show these supplier’s tariffs for free then the suppliers may increase them in order to pay for the acquisition fee to pay the PCWs for hosting them.

All in all, we see a price cap as a win for those people who can’t or are frightened of switching and don’t see much impact for the dedicated switchers.

Thanks for the response @“Will at Bulb” - it’s good to see that it’s business as usual at Bulb, not that I expected anything else!

Once we allow the government to set prices for one industry, we set a precedent & manifesto pledges for price capping could become commonplace. This is a slippery slope & could ultimately be a barrier to business. Talk of price capping could already be making any new entrants to the energy business think twice…and that reduces competition.

There may be areas of dysfunctionality, but that’s a price you have to pay for a free market economy.