Hi everyone,
Apologies for the delay in posting this. So, Ofgem are consulting on creating a variant price cap that has a £0 standing charge, which sounds great in theory. However, to compensate, they will vastly increase the unit rates.
Ofgem have made it extremely clear that everything has to balance, the variant cap will only work if some consumers are worse-off, because some consumers will be better off. Ofgem do not want this variant to be used as a way to cut costs for customers, they maintain that suppliers need to receive the same amount of money overall, and that the only reason for having a £0 price cap is to give consumers some extra choice.
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To make sure customers aren’t on the £0 standing charge during summer (when it’d save loads of money) and then move to the normal price cap in winter (again, saving money), Ofgem are proposing locking customers out of the normal price cap for 12 months if they move to the £0 standing charge. The danger here is that customers will have really cheap bills in summer, but insanely expensive bills in winter, especially if you’re on key and card meters!
Ofgem were also consulting on various ways of applying the increased unit rates, the options proposed were a flat price tariff, a rising block tariff (price starts low but increases once you use a certain amount of energy in 12 months) or a falling block tariff (price starts high but decreases once you use a certain amount of energy in 12 months).
Anyway, below is my response in italics, the consultation has been closed for a few days now so don’t worry about sending it in to Ofgem, this is just for your information.
RE: Introducing a zero standing charge energy price cap variant
Standing Charges Team,
The Ofgem Price Cap, introduced in 2019, was originally a great piece of protection for consumers. It significantly limited profitability in the energy supply industry, without abolishing it entirely. The Price Cap led to a great reduction in energy bills for the disengaged majority of the time, and yet it still allowed competition to flourish.
The changes made to the price cap since the beginning of the energy crisis in 2022 have diminished that protection for existing consumers greatly. Excessive profits are commonplace for suppliers, network operators and power stations alike, all seeing huge increases over the last three years, all whilst consumption of energy in the UK has continually fallen and the use of renewable energy sources continues to grow. It is counter-intuitive that consumers have worked hard over the last 12 years, reducing average gas consumption by over 30% and average electricity consumption by almost 20%, yet bills are 80% higher than they were in 2020. The uptake of green energy sources has also been pushed as a way to reduce our bills, green energy usage is up from around 15% in 2013 to almost 40% in 2024, yet bills continue to rise.
There is clearly something fundamentally broken in our energy system, and I had hoped to see the announcement of a zero standing charge price cap being considered as a possible way for Ofgem to start giving UK consumers some much needed relief. Needless to say, I am disappointed by the options that were presented in this consultation.
Considering the recent discovery by Citizen’s Advice of a £4bn overpayment by consumers to give excess profits to network companies, I would have expected to see some leeway given on the costings from Ofgem.
This consultation seeks to simply move fixed costs onto unit rates, benefitting a minor segment of the country, whilst making things more expensive for others. More worryingly is that your consultation openly states that this zero standing charge price cap will require some customers to take it up even though it’ll cost them more than the normal price cap. This proposal is simply a shuffling of costs, it doesn’t financially benefit consumers, it’s whole aim appears to be just to placate the masses that are calling for standing charges to be removed.
Thoughts on the actual Proposals
I have a few thoughts I’d like taken into consideration for this consultation.
Lock-in
First, and I brought this up in the latest Ofgem-Consumer Groups monthly meeting, the phrase “lock-in” should not be used. This has the implication that a consumer cannot leave the zero-standing charge price cap tariff. The proposal you’ve described is actually a “lock-out” of the standard price cap, where consumers cannot go to the current variant of the price cap, but they are able to switch to any fixed rate contract. “Lock-in” could make consumers think they are not allowed to leave the zero standing charge tariff at all, which would result in two negative affects:
- There will be lower take up as people will want to avoid being “locked-in” to something they cannot leave
- Of those that do take it up, some consumer will miss out on savings from cheaper fixed rate tariffs they find months later, because they’ll believe they’re “locked-in” when they aren’t.
Messaging is important, please ensure you do not use the phrase “lock-in period” going forward.
I do not agree with the option of introducing a fixed cost recovery charge.
I do not agree with any notion to block switches between zero standing charge tariffs between suppliers. In a competitive market, we’d expect to see customers moving from one supplier to another fluently, so any supplier that suffers from losing a customer should compete to win others. This effectively will act as an incentive for suppliers to improve non-cost-based competitive factors, such as customer service ratings. It’s also worth noting that only 20% of the UK are switching at the moment, and even at it’s peak the UK switching market only had 50% of consumers actively switching – so the concern of “frequent switching” causing issues is fairly limited at the moment.
Tariff structure
Of the three proposed structures, I think keeping things simple is key to ensuring consumer uptake. As such, the first option, of a single rate tariff structure is the most sensible option.
I oppose the idea of a falling block tariff structure. This greatly limits the benefit of a zero-rate standing charge for low usage properties, and it removes incentives for reducing energy usage after a consumer hits the block threshold.
I can see the merit in a rising block tariff, especially as it would incentivise those just above the threshold to limit their usage toward the end of the 12-month period. However, this will add further complexity to a consumer’s understanding of their bills, it’ll mean suppliers need to provide additional communication informing the customer of when they reach the threshold and their prices are changing, additionally it would require customers to give accurate meter readings regularly or for smart meters to be installed. There is a whole range of complexities and potential fairness issues surrounding block tariffs, it will become very difficult to enforce and is likely to result in negative experiences. Hence, a single rate tariff is likely to be far more effective.
An additional benefit of a single rate variant cap is that it would allow Economy 7 customers to have access to this option. I understand and agree that a block rate tariff would have insurmountable implementation difficulties for Economy 7 consumers, hence another reason why block tariffs should not be the way forward.
I do not agree that smart meters should be a pre-requisite for this type of tariff. Many consumers do not want smart meters and are rejected from receiving the benefit of cheap, fixed-rate tariffs as most suppliers are making them smart-meter only. It would be wholly unfair for our regulator to also create a tariff that forces consumers to sign up for a meter they do not want.
Thank you for taking the time to review my response above, this is a non-confidential response.
Kind regards,
Richard Winstone
The Regulator Guy
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