The government will today publish draft legislation to cap energy prices until at least 2020 in an effort to reduce bills for millions of households.
Under the bill, energy regulator Ofgem will be required to consult and impose an absolute price cap on standard variable tariffs (SVTs), which are default tariffs that can cost hundreds of pounds more than cheaper deals. Around 18m customers are currently on SVTs or other default tariffs.
The Department for Business, Energy and Industrial Strategy (Beis) said the cap would come into effect as soon as practicable after legislation is passed, but it is unlikely to be in place before the winter.
The cap would be a temporary measure with effect initially until the end of 2020 with the possibility to extend it up to the end of 2023 at the latest on the advice of Ofgem.
Prime Minister Theresa May first proposed a cap on energy prices during the General Election campaign, and last week at the Conservative party conference she promised “an end to rip off energy prices once and for all”.
“While we favour free markets, we will take action to fix them,” May said.
Energy bills in the UK have doubled in the past decade to average around £1,200 a year.
However, the plans have been criticised over the potential to cause bills to rise in the longer term and make consumers even less engaged with their bills.
Keric Morris, energy partner at management consultant Oliver Wyman, said:
The energy price cap marks a regulatory shift in focus away from ‘switching’ as the primary measure of a healthy market. While the price cap will benefit apathetic customers that don’t switch, it is also likely to push up fixed prices at the lower end of the market as suppliers look to recoup earnings from their most profitable SVT customers. This would result in prices in the market converging, reducing the incentive for customers to switch.
Peter Earl, head of energy at Comparethemarket, said a price cap would not fix the broken market.
“At best, it is a short-term solution which could see some households on the worst value tariffs pay a little bit less for their energy. At worst, it could simply turn people off ever looking at an energy bill again,” he said.
Richard Neudegg, head of regulation at uSwitch, added the the bill will lull consumers into a false sense of security.
Ofgem extends price cap
Yesterday, the energy watchdog announced it would extend its price cap on prepayment meters to one million more vulnerable households this winter.
Ofgem added that a wider cap for all consumers on SVTs would only be possible once legislation was in place.
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