Tuesday 12 October 2021
Gas bills are rocketing – but there’s supposed to be a ‘price cap’ on them to protect consumers. Why isn’t it working?
Claudia Williams: Hi I’m Claudia and this is the Sensemaker.
One story everyday to make sense of the world.
Today, why the energy price cap isn’t working.
“Today is a great day…”John Penrose speaking in parliament in 2018
That’s the MP John Penrose speaking.
“… for those who say politicians never deliver on their election promises, we can selectively send a blaring foghorn reply “you’re wrong!” because today’s energy price cap bill is an incredibly rare politician unicorn. A pledge that not only has cross-party support… but is getting done…”John Penrose speaking in parliament in 2018
His background is in big business. Specifically, risk management and strategic management.
So you could say he was an obvious choice for the Prime Minister’s Anti-Corruption Champion in 2017.
And he was speaking there, one year on in 2018, about fixing what he saw as a broken energy market.
“A two-tier market where millions of customers are penalised for being loyal, where there are sneaky price hikes, where people who’ve forgotten to switch or gouged on super expensive rates they’ve never agreed to, about customers being taken for granted and taken for a ride.”John Penrose speaking in parliament in 2018
Now back then – when Theresa May was prime minister – the Conservative party had a manifesto promise to end “ripoff energy prices once and for all”.
Just a year before the 2017 election, the UK’s biggest energy companies made more than £1 billion in profit. They were taking advantage of consumers who failed to switch suppliers to get the best deals meaning the gap between the best and worst tariffs widened to £300 a year.
And so the government’s solution was to put what’s known as a “price cap” on energy bills.
The aim of the price cap was to help control the cost of gas and electricity for domestic consumers in the UK and it would be overseen and reviewed by the industry regulator, Ofgem.
It all sounds pretty straightforward.
And it was John Penrose who was largely considered the “architect” of that price cap.
But when questioned on BBC Radio 4’s Today programme back in August of this year, just three years on from his “rare political unicorn” moment, John Penrose admitted not all was well with the price cap.
Interviewer: “You called for an energy cap back in 2017. You got one. Is it working?”
John Penrose: “Erm not really I’m afraid is the answer…”John Penrose being interviewed on BBC Radio 4’s Today programme
Well you can say that again.
We’re seeing unprecedented rises in wholesale prices. The price cap has just risen for the second time this year, putting it at its highest level ever.
Comparison websites have largely suspended their services, and a number of suppliers are going bust.
That’s on top of business leaders warning they could be forced to shut down operations because the price cap doesn’t protect them.
So the question is, who gets to decide what’s a fair price?
The price cap is based on a typical domestic customer using a “medium” amount of energy each year.
It limits the “unit rate” and the “standing charge” – that’s the fixed daily amount you have to pay – that suppliers can bill for their default tariffs. That’s the standard plan energy providers put you on if you’re not signed up to a fixed rate deal.
And the price cap is reviewed twice a year, which often means it changes twice a year. Announcements are made around February and August, with actual price changes typically happening two months later.
Those prices are calculated by the industry regulator Ofgem. They set the cap level for summer and for winter based on the underlying costs to supply the energy.
Here’s Ofgem’s director Jonathan Brearly.
“Well what we’ve seen is that the profits of the energy companies have come down dramatically since we introduced the price cap, and actually across the market the profit margin is zero right now so we are making sure that companies charge a fair price but what we can’t do is to ask them to sell energy for less than they have to buy it for.”Jonathan Brearly, Director of Ofgem
It’s that last point from Jonathan Brearly that’s important. Ofgem can’t ask energy companies to sell energy for less than they bought it for.
So, what does that mean for consumers?
“Europe is facing an energy crisis. Spiking gas prices, soaring electricity bills… It’s the perfect storm. Low gas stocks after a cold winter, a shortfall in wind power and surging demand as countries emerge from the pandemic…”BBC News
You’ve probably heard analysts describing our current energy crisis as the “perfect storm” and it’s that perfect storm which is pushing the price cap up again.
In 2021 alone consumers who are on a tariff which relies on the price cap – that’s 15 million households – have received a £235 rise in prices. The latest announcement means the “medium” household can expect their bill to increase by around £139 per year.
And so although the cap is there to stop energy firms making unfair profits, Ofgem states that “legitimate costs” have to be passed through to customers.
Some suppliers want those wholesale costs to be passed on more quickly than the current six month review. But other suppliers believe the cap dampens competition all together, and most prices just climb up to it anyway.
John Penrose admits that the price cap isn’t working. But he insists it’s still the answer, it just needs reforming.
The question left for the government is, what is that reform?
Today’s episode was written and produced by Imy Harper.
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