September 6, 2018 / 6:25 AM / 2 months ago

UK regulator caps energy prices to save households about a billion pounds a year

LONDON (Reuters) - Britain’s regulator on Thursday proposed a price cap on default energy bills to save households about a billion pounds a year and aims to implement it in time for winter following a government promise to tackle “rip-off” prices.

FILE PHOTO: A gas cooker

The energy regulator, Ofgem, said it wanted to cap the default electricity and gas bill at 1,136 pounds a year, a level below the most-used tariffs set by the country’s big six suppliers but not as severe as some had expected.

Shares in Centrica (CNA.L), whose British Gas is the largest household energy supplier in the country, SSE (SSE.L) and EDF (EDF.PA) rose after the announcement.

Shares in E.ON (EONGn.DE), Innogy (IGY.DE), whose Npower is a supplier, and Iberdrola (IBE.MC), which owns Scottish Power, were little changed or slightly lower.

The cap will be in place by the end of this year and is intended to be a temporary measure lasting until 2023 at the latest, Ofgem said.

The regulator will review the cap in April and October each year and adjust it according to changing costs such as wholesale energy prices. Those two months are the start of the summer gas season, when demand and thereby prices are usually lower, and the winter season, when prices usually rise.

The regulator was tasked with setting a cap by parliament after an influential committee of lawmakers called Britain’s energy market “broken”. Prime Minister Theresa May said the energy tariffs were a “rip-off”.

Energy bills have risen despite years of market reform, becoming an easy target for the increasingly left-leaning opposition Labour party, prompting a promise to get prices under control by May’s usually free-market Conservatives.

Ofgem said the cap should save a household using normal amounts of energy 75 pounds a year and those on the dearest tariffs should save 120 pounds, estimating that a billion pounds would be shaved off suppliers’ revenues.

“We expect there to be lower profitability going forward,” Ofgem Chief Executive Dermot Nolan said of the big six, adding that the cap should nevertheless boost their incentive to make operations more efficient.

Ofgem’s proposal is now open to consultation with companies and other interested parties. The regulator will formally set the cap in November.

Proposed Ofgem price cap compared to "big six" average duel fuel tariffs - reut.rs/2wNiomT

“LINE IN THE SAND”

The price cap applies to the so-called standard variable tariff (SVT), the most popular type of rate offered by the big six, as well as other default deals. Customers on SVT pay on average 1,185 pounds a year.

The big six have tried to cut the number of consumers on SVT although Ofgem says over half of British customers use such a tariff. The difference between the costliest SVT from the big six and the cheapest tariff available was over 350 pounds.

“We do not believe a price cap is a sustainable solution for the market, and is likely to have unintended consequences for customers and for competition,” Centrica said in a statement.

The big utilities have also been raising SVT prices despite government pledges to limit costs for consumers, although they have pointed to rising wholesale energy prices.

Ofgem’s cap, which will protect 11 million customers, is in the lower range of analysts’ expectations, who pegged it at between 1,120 and 1,200 pounds.

RBC analyst John Musk said the retail market was characterised by “high levels of political focus, regulatory scrutiny and intense competition from smaller suppliers”.

“However, this morning’s news acts as a line in the sand, starts to give clarity on future margins and has removed some of the downside risk to market expectations.”

Break-up of UK retail energy price - reut.rs/2oN4nBb

Additional reporting by Susanna Twidale and Nina Chestney; Editing by Dale Hudson and David Evans

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