On 12 October 2017, the government published the Draft Domestic and Electricity (Tariff Cap) Bill (the “Bill”). The Bill’s purpose is to provide for a temporary price cap for domestic consumers on standard variable tariffs (“SVTs”) and default tariffs. The cap will be set by the independent energy regulator, Ofgem and is temporary in nature, lasting until the end of 2020, with the potential to extend it for a further three years if needed. The cap will apply in England, Wales and Scotland.

Background

In 2016, following its two-year energy market investigation, the Competition and Markets Authority (“CMA”) found that customers of energy suppliers were paying £1.4 billion a year more than they would in a truly competitive market, a figure disputed by those in the industry. The CMA found that weak customer response in the market gives suppliers a position of unilateral power concerning their inactive customer base which they can exploit in the form of SVTs - the default rate that energy suppliers charge if a customer does not select another tariff.

In spite of its findings, the CMA decided not to introduce a price cap on SVTs (although one member dissented from the majority view on this). Instead, the CMA decided to introduce a price cap for those customers on pre-payment meters (due to particular issues in that sector of the market) and focus on a raft of remedies aimed at encouraging competition and switching.

Since the CMA’s final report, the issue of intervention in the energy supply market has been high on the political agenda. After the election earlier this year, however, it appeared that the Government was hoping to avoid legislation in favour of relying on Ofgem to introduce a price cap through its existing licence modification powers. The cap proposed in the Bill is far wider in scope than the existing cap in place for three million vulnerable households (which is due to be extended to an additional one million households by February 2018, following Ofgem’s announcement on 11 October 2017).

Key provisions

The Bill provides for a price cap and that Ofgem must impose the cap as soon as practicable after the Bill is passed. Ofgem is given a limited discretion on how to implement the cap and is required to have regard to five specified matters in exercising its functions in relation to the imposition of the cap. These matters differ from those that it is normally obliged to have regard to when exercising its functions. Of particular note is the reformulation of the “finance duty” so that the duty is only to have regard to the need to ensure that holders of supply licences who operate efficiently are able to finance their authorised activities.

These tariff caps will not apply to “green” tariffs or to customers who benefit from the prepayment meter cap introduced earlier this year.

A statement released by the Department for Business, Energy and Industrial Strategy states that the cap will be absolute (a fixed maximum price) as opposed to a relative price cap (where the most expensive tariff can only be a set percentage more than the cheapest).

What next?

The Bill will of course be subject to potential amendment during its parliamentary passage and it will be interesting to see how it develops.

Ofgem must consult with energy suppliers and specified interested parties on the methodology for deciding the cap, as well as the price. The cap itself is unlikely to come into effect until Spring 2018, once the Bill has received royal assent and relevant consultations have been undertaken.

There is also the possibility of a legal challenge being brought at a number of stages. The route chosen for implementing the cap makes this more difficult, but it is still possible to challenge primary legislation on some grounds, for example, on the ground of incompatibility with the requirements of the European Energy Third Package.