Doesn’t the energy price cap protect customers?
Joel Hills, ITV News business and economics editor, has details of the increase and how it will affect families across the country
OFGEM’s decision to raise the energy price cap by a record amount and for the second time this year inevitably raises questions about its effectiveness.The cap was put in place in 2018 to protect the millions of customers who did not change their gas and electricity supplier. OFGEM, perhaps unsurprisingly, insists that it has been transformative.The regulator calculates that businesses and households who are unwilling or unable to seek out the best deals are no longer being scammed and paying between Â£ 75 and Â£ 100 less for their gas and electricity than they would otherwise.
Energy companies have certainly felt the impact of the cap.
British Gas profit margins fell from 6.7% in 2018 to 1.7% in 2020.
OFGEM estimates that E: ON, EDF and Scottish Power all sold gas and electricity at a loss in 2019 and 2020.
OFGEM says it is raising the price cap because there has been a record increase in wholesale gas and electricity prices in the past six months.
Its chief executive, Jonathan Brearley, insists that some energy companies will fail unless they are able to cover their increased costs.“We cannot ask suppliers to sell energy for less than it costs them to buy,” Breaerley told ITV News. “Profit margins are already close to zero:”
ITV News Business and Economics Editor-in-Chief Joel Hills explains why some energy companies can’t reduce upcoming price hikes for customers
Of course, not all energy companies are the same.
Companies like Centrica (which owns British Gas), EDF and Scottish Power sell and produce gas and electricity to consumers as well.
All three and therefore are less exposed to changes in wholesale prices and measure their profits in the hundreds of millions of pounds. It is fair to ask if the price cap should reflect this.
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A total of 23 energy suppliers have gone bankrupt since the cap was introduced, including Spark, Breeze and GB Energy.
N Power – one of what were once called the âBig 6â energy providers – also went bankrupt.The Big 6 are now the Big 5 and they are getting smaller and smaller. They still dominate the market but their grip is weakening. Last year, they represented 7 out of 10 customers, 10 years ago it was more than 9 out of 10.One thing that the energy price cap has failed to do is improve competition in the market, which remains weak.
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Some consumers are highly motivated and engaged, but most are not.
Rates of change have increased slightly since the introduction of price caps (20% of customers changed energy providers last year, up from 17% in 2017), but more than half of all households in the Kingdom -Uni still benefit from some form of standard variable tariff.
The prospect of losing up to Â£ 150 a year could change that.The idea of ââcapping energy prices was invented by Labor before being mocked and then stolen by the Conservatives.It hasn’t fixed all the dysfunctions, but it certainly made the market fairer.