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Next day switching and a price cap: will this fix the broken energy market?

Paloma Kubiak
Written By:
Paloma Kubiak

A committee has called for an absolute energy price cap to be implemented while the regulator is looking at ways to bring in next working day switching. Are these measures enough to restore competition in the market?

The Business, Energy and Industrial Strategy (BEIS) Committee has responded to the government’s energy price cap draft bill.

The MPs said the ‘Big Six’ energy providers (British Gas, EDF, E.ON, Npower, Scottish Power and SSE) have “brought the introduction of a price cap upon themselves by raising of prices in 2017” and “by failing to take effective action against the overcharging for years of those customers on standard variable tariffs”.

In its response, the Committee said competition in the domestic energy market isn’t working effectively for the 12 million stuck on pricey SVTs. In fact, the energy market is now a two-tier system with some paying £300 more than others.

As such, it said an absolute energy price cap, rather than a relative price cap which would force the Big Six to reduce the gap between their advertised tariffs and their tariffs for loyal customers will be the most effective measure.

‘Big Six may whine and wail’

Rachel Reeves MP, chair of the BEIS Committee, said: “The energy market is broken. Energy is an essential good and yet millions of customers are ripped off for staying loyal to their energy provider. An energy price cap is now necessary and the government must act urgently to ensure it is in place to protect customers next winter.

“The Big Six energy companies might whine and wail about the introduction of a price cap but they’ve been overcharging their customers on default and SVTs for years and their recent feeble efforts to move consumers off these tariffs has only served to highlight the need for this intervention.”

Industry experts have however voiced their concerns about the short-term price cap suggestion.

Stephen Murray, energy expert at MoneySuperMarket, said from a consumer perspective, nothing will change in the short-term.

“Savings from switching are still far greater than any price cap can offer and you can bring your bills down by £250 or more by switching today, rather than waiting months for a price cap to take effect.

“Longer term, the real issue that needs to be addressed by the government and regulator, Ofge,m is consumer engagement. It’s important a price cap does not reduce switching and competition – a point acknowledged by the BEIS Select Committee. This would create a growing market of disengaged customers who are under the false impression that a price cap means they are paying a fair and competitive price for their energy.

Next working day switching

Regulator Ofgem has also outlined plans to enable consumers to switch energy supplier by the end of the next working day if they choose.

This would be done by “harmonising” the gas and electricity switching process by introducing a ‘centralised switching service’ (CSS).

Dermot Nolan, chief executive of Ofgem, said: “The current switching arrangements were largely designed for a more analogue age. But the advent of smart meters, half-hourly settlement, price caps, and more fundamental changes to the energy system itself, means the time is right to reform the switching arrangements too.”

Ofgem documents reveal that consumers will be able to submit a request to a supplier to switch and they will be with that supplier by midnight the following working day. The process for a non-domestic consumer would take an additional working day.

Details are yet to be finalised but next day switching is expected to be implemented by the end of 2020.

Robert Cheesewright, director of policy and communications at Smart Energy GB, said: “It is encouraging to see that Ofgem has given industry the go-ahead for making next-day switching a reality – ensuring that switching regulations keep up to speed with our nation’s new digital system.

“Smart meters give you the information you need to make educated choices about the right supplier and tariff for you. Smart meters also enable faster switching, flexible time-of-use tariffs, and a better deal for prepayment customers.”