Ofgem's energy price cap is a blunt stick but it will protect vulnerable consumers
Analysis: The cap is due to be lifted in 2023, but will the regulator’s efforts to fix the market in the meantime bear fruit, asks James Moore?
Trumpeting its price cap, Ofgem declared proudly that it would “give 11 million a fairer deal from 1 January”. And indeed, it will come into force in the new year, now that an industry consultation has closed.
For the record, it’s a tad higher than had previously been proposed. Standard variable energy tariffs (SVTs) have risen by even more, however, so the savings when it comes into force will be greater than had been expected.
SVTs might have increased because of rising wholesale energy prices. But it might also be because the big suppliers have decided to have one last party before the hammer comes down.
The privatised energy market has for years been failing the consumers who were supposed to benefit from it. The way SVTs have moved provides more evidence of that. They underline why the cap is necessary and why Ed Miliband was on the right track with the energy price freeze he first proposed as Labour leader. For his sins, Mr Miliband was portrayed by the Tories, who have now enthusiastically embraced it, as a raving communist.
Anyway, savings! The cap will put an extra £76 in the average consumer’s pocket, £120 for those on the most expensive tariff. It could make a big difference for those on lower incomes.
However, the fact remains that better still is available. The average consumer could save a packet before the cap’s introduction. Despite what its critics (and they are many) would have you believe, they will still be able to save a packet when it’s finally in force too.
The trouble is, a combination of inertia and, perhaps, a feeling that the market is complex – difficult to understand and navigate – holds people back from realising those savings.
I say this as one of the minority of Britons who have switched in the past, and saved money through so doing. I really ought to do it again. It’s just that the job keeps getting put off. That’s the sort of thing that tends to happen when you have children and your weekends are full.
Can Ofgem find a way of making it easier for more people to take the plunge? The regulator says it wants to, not least because cap is, in theory, due to come off in 2023. It could be lifted as soon as 2020.
To that end, I’m told there are lots of initiatives underway. They include the provision of mandatory compensation for people when switching goes wrong, and chivvying the energy companies into making the process move quicker.
Ofgem is also trialling what it calls “collective switching” in which consumers who haven’t switched for a long time, or ever, will be contacted and told of deals they could get.
It all sounds fine and dandy. But you do rather run into an issue raised by another regulator, the Financial Conduct Authority, which has been looking into the way insurers set their prices, and the way some of them rip off their customers by repeatedly raising them to those who stick with them at renewal time.
Vulnerable consumers, elderly or disabled people for example, can be particularly prone to this sort of sharp practice. It’s partly because switching insurer can be daunting. It requires consumers to be web savvy, and to be willing to fill in forms that can sometimes trap the unwary.
It ought to be simpler to switch energy provider, which is, after all, a simpler product. But nervousness, poor internet connections, a lack of facility to do things online, all still play a role in keeping people stuck on the poor value SVTs offered by big, profit hungry energy firms – the big six in particular, soon to be the big five as a result of the merger of Npower and SSE.
That won’t change unless and until switching energy provider is as easy as ditching Sainsbury’s in favour of, say, Tesco for your potatoes and tomatoes.
The problem with markets is that even when they work (and the current energy market doesn’t) they tend to be of most benefit to the smart and the nimble, who also tend to be comfortably off, and thus in least need of the savings that they can reap through deftly navigating them.
The cap is a blunt stick. It’s the sort of thing that economists hate. But even though it offers only limited and imperfect protection to the vulnerable, it might be necessary to keep it in place beyond 2023.