Energy price cap

Energy price cap

Energy price cap

The end of the SVT

The end of the standard variable rate  tariff (SVT) is in sight as the UK government, the energy regulator, Ofgem, and the Competition and Markets Authority (CMA) have all made it increasingly clear that, in their view, the energy market does not deliver ‘good outcomes’ for all their customers. Energy supply in the UK, which is dominated by the Big 6 suppliers*, has been the subject of considerable market investigation in recent years.

*The Big 6 are: British Gas, EDF energy, E.ON, n-Power, Scottish power, and SSE.

See oligopoly

Typically, an energy customer will initially sign up to a fixed price plan for their energy for a period of anything between 6 months and 4 years. After that, they move to a standard variable rate tariff, which according to Ofgem, can be up to £300 a year more than the cheapest rates available tariff in the open market.

It is the SVT which will be the subject of what Ofgem calls a price safeguard, but which is more popularly known as a price cap. There already exists a price cap for the metered charges which affect those who have been forced to move to pre-pay meters. Ofgem has announced that this cap, the prepayment safeguard tariff, will be extended to a further 1 million vulnerable households this winter (2017/18) and to a further 2 million households in the following winter.

While most energy suppliers still use the SVT fall-back default option, at least one major supplier, e.on, has abandoned the SVT and requests that customers at the end of their fixed-term contract make a conscious decision about which new tariff they wish to be put on. Other suppliers are likely to introduce a similar system, even before the new legislation kicks in. Not only does the default price SVT affect domestic customers, Ofgem has also stated that around 45% of UK micro-businesses (those employing less than 10 people) are on a similar SVT tariff.

Energy price caps limit how much a supplier can charge a customer per unit of energy, and are based on estimates of the production costs of a fully ‘efficient’ supplier, including the cost of wholesale energy, various network charges, the cost of complying with government schemes, and general inflation. Suppliers will be able to charge less than the cap, but not more. This week the government has published its draft Bill detailing how the cap in the UK will be applied. The cap will run until at least 2020.

Further initiatives

As a further initiative to increase competition in the energy supply market by raising consumer confidence in the switching process, Ofgem has also proposed that customers whose ‘switch’ goes wrong should be automatically compensated. Ofgem has also requested that energy suppliers regularly prompt customers when coming to the end of a fixed term tariff to encourage them to make more informed (and rational) decisions. In the event that, even after prompting, customers do not make a specific choice, suppliers will have to roll them onto another fixed term contract which Is ‘the same price or cheaper than the variable tariff that the customer would otherwise have been rolled onto.’

Read more on default choices, paternalistic policy,  and behavioural economics.