Energy News – Prepayment meter price caps from Ofgem

Ofgem have announced the details of the Prepayment meter price caps which come into effect on April 1st 2017. The announcement outlines a process which will see a revision of prices twice a year in April and October. Exact details of the cap will be published in February and August respectively https://www.ofgem.gov.uk/publications-and-updates/prepayment-price-cap-1-april-2017-30-september-2017 Ofgem anticipates there will be an average benefit of roughly £80 a year to households with Dual Fuel PPM’s.

 

Acknowledging the high tariff rates that PPM customers endure and taking steps to remedy this financial burden can be seen as a positive step. The cap is temporary and it is proposed to run until 2020 when the national Smart meter roll out is due to be completed. The Smart Meter roll out programme is heralded as bringing the end to disparity between PPM and credit pricing in the domestic energy market.

 

So, is the price cap a positive step? Well, those customers with the ‘big six’ energy suppliers, (estimated to make up 87% of the market) paying through prepay for their Gas and Electricity are set to see the biggest savings. For many of them a saving of £80 will undoubtedly be welcome. However, the price cap will reduce the pricing differential for this already underserviced segment of the market, narrowing the difference between the best and the worst tariffs. Effectively then, the steps the 13% of engaged customers have already taken to improve their circumstances will be negated. As the pricing gap narrows the rewards available for switching suppliers diminish and rather than stimulate the market into more positive action, there is a danger this step will actually reduce switching, stagnating the market and discouraging suppliers from investing in activity to attract new customers. Effectively Ofgem and the CMA are pressing a giant ‘Pause’ button on the PPM market in the hope that by 2020 a better, fairer solution will have emerged.

 

Currently the price differential between best and worst PPM tariffs is approximately £316 (this is based on annual usage of 3100kwh of Electricity & 12500kwh of Gas. Total spend is therefore between £1002.08 – £1318.80, these figures are correct on 07/02/2017 for the Norweb region using Energy Angels platform for comparison). If we use British Gas as the current benchmark (£1109 annually, supplying approximately 11m, or 1/3 of UK properties) then savings of £107 can easily be attained by simply switching supplier today. The cap therefore represents less of a saving, than the average switch. Of course, making a switch requires action on the consumers behalf and that is where the problem lies. We have a market which although fiercely competitive, just isn’t really accessible to, or understood by the majority of consumers.

 

The CMA’s list of remedies, are in part at least, schizophrenic… on the side of credit customers the verdict is “the market is competitive, customers don’t engage enough, we must take steps to encourage greater engagement” (hence a database of ‘sticky’ households to be made available to suppliers for them to vie for their custom). For prepay their position is the opposite “the market isn’t competitive, we must control it, we will discourage activity and effectively competition”. A £316, or 24% differential seems competitive to me. I count 33 PPM tariffs available in the market today, that is up significantly from 13 tariffs just over a year ago. A figure that has barely increased changed (12 tariffs were available) since 2012, when I first started looking.

 

Is this the best they (the CMA & Ofgem) can do though? Personally I don’t think so and I am not alone. I don’t believe that imposing pricing restrictions on a competitive market can be a long term solution. If we look at the wider world of retail (supermarkets and financial products jump to mind primarily) other markets manage to regulate themselves effectively by engaging with their customers and competing on price. Two years of work by the CMA have highlighted exactly where the barriers to engagement lie. The remedies proposed, and now to be imposed, seem to have been hurriedly brought together and fall well short of the action needed, they simply do not do enough to effect any real change.

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About The Author

Managing Director for Energy Angels Group. Proud Husband and Father to a wonderful family. Passionate about our belief that there is always a better way when it comes to energy for social housing.

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