John Penrose MP ‘delighted’ that his campaign for a a cap on energy prices will turn into a manifesto pledge

John Penrose MP today welcomes reports by the Sunday Times that the Government plans to include plans to cap energy prices in its manifesto:

“The Big 6’s game is up. The Government is clear it’s going to act. 20 million or more of us are ripped off by the Big 6 and I’m delighted that my proposals are making their way into our manifesto.

Mr Penrose has been campaigning on this for over four years and earlier in the week, the Chairman of the BEIS Select Committee, Iain Wright MP, said:

“Mr Penrose led an excellent debate[1]…his contributions were first class…there was absolute unanimity from all sides of the House on the need to act.”[2]

On 17th March, the day after John Penrose MP’s debate in the House of Commons on energy prices,[3] the Prime Minister agreed that the energy market was ‘manifestly not working’ for consumers.  She further announced that the Government would ‘step in’ to protect the ‘vast majority of consumers’.

Almost 20 million customers (two thirds of energy consumers) are on one of these expensive ‘Standard Variable Tariffs’ (SVTs).[4]

John Penrose has been campaigning for the Government to introduce a relative price cap for which he is still receiving substantial industry support.[5]

The relative price cap proposal was most recently outlined in Mr Penrose’s submission to the Government’s consultation, Building Our Industrial Strategy.[6]

Entitled, Liberating the Energy Market, Mr Penrose says:

“…[V]ery high levels of rip-offs and consumer detriment will continue unless we introduce a further, temporary measure as well.” [7]

Mr Penrose has said that the cap should be set at 6%, meaning that if implemented, Ofgem would be able to ban energy companies from charging SVT customers a price that is more than 6% above their most competitive (advertised) rate.

Notes

These calls come as part of John Penrose’s 4-year campaign to:

“[replace] failed economic regulators with consumer reforms, so we all get a better deal on our utilities.”[8]

The extent of the problem facing UK energy customers

  1. Spending on energy amongst the poorest households is c.10% of total household income (in 2004 it was 5.5% and in 2015 it was 9.7% according to Ofgem).[9]
  2. Price rises are being announced regularly and recently.  For a comprehensive list of recent announcements from the BBC, click here.  The 3rdFebruary Npower rise was branded ‘shocking’ by the former Npower boss, Paul Massara.[10]
  3. Ofgem referred the UK Energy Market to the Competition and Market Authority (CMA) in June 2014 and in its report (Energy Market Investigation Final Report, June 2016)[11]it found that 90% of UK domestic energy customers are entirely disengaged and unable/unwilling to switch energy providers.[12]This lack of engagement is the ‘market failure’ Mr Penrose (and now the Business Secretary and Prime Minister) are talking about.
  4. In the retail gas market, SVT prices have averaged at least 20% more than fixed-term contracts over the last four years, with peaks of between 33-50% higher at different points in the last year. In the wholesale gas market, the relationship is reversed, with spot prices averaging about 12% less than one year contracts over the same period.[13]

So the gross margin (between wholesale gas costs and revenues, before other costs) which gas suppliers are charging SVT customers is very significantly larger than for fixed-term contract customers and, as the graph also shows, the gap has been getting steadily bigger over the last 4 years as well.

Mr Penrose says that this progressively worsening price-gouging behaviour must be stopped or put sharply into reverse and Parliament must step in to give the Government a mandate to do something about it.

  1. Mr Penrose’s policy was originally outlined in a letter David Gray, Chairman Ofgem, dated 26th January 2017.[14]The quotes below, however, are taken from this his recently submitted response (Liberating the Energy Market) to the Government’s, Building our Industrial Strategy consultation:

“The Relative Price Cap

“The consumer-power recommendations above are essential, long-term answers to make the energy sector behave more normally, like other sectors with much lower levels of consumer detriment and customer complaints. But the changes will take years and, in the meantime, very high levels of rip-offs and consumer detriment will continue unless we introduce a further, temporary measure as well. 

“The answer is a relative price cap where default tariffs for everyone who isn’t engaged can be no more than X% higher than their existing supplier’s best deal, with ‘X’ being determined by Ofgem. The advantage of this approach is that it maintains competitive pricing pressures, does not limit the quantity or overall shape of each supplier’s tariff offers, and won’t prevent insurgent end-to-end switching firms from competing strongly either. It distorts competitive commercial activity as little as possible while still protecting the large number of disengaged customers from excessive consumer detriment.

“Which brings me to possible values for ‘X’. As the attached graph demonstrates (John Penrose  – wholesale & retail spot and hedge gas prices), in the retail gas market SVT prices have averaged at least 20% more than fixed-term contracts over the last four years, with peaks of between 1/3 and ½ higher at different points in the last year. In the wholesale gas market, however, the relationship is reversed, with spot prices averaging about 12% less than 1 year contracts over the same period. So the gross margin (between wholesale gas costs and revenues, before other costs) which gas suppliers are charging SVT customers is very significantly larger than for fixed-term contract customers and, as the graph also shows, the gap has been getting steadily bigger over the last 4 years as well. My suggested value for ‘X’ would, therefore, involve a reset where this progressively worsening price-gouging behaviour is not only stopped but put sharply into reverse. The smallest difference between retail SVT and fixed-term contracts in the last 4 years has been 6% (in October 2013). Given the enormous margins which suppliers have taken from SVT customers over time, I propose we return to that moment by Ofgem setting ‘X’ at 6%.

“I’ve spoken with all the major UK energy companies and many of the challenger companies are backing my proposal.

“I also propose that, because this proposal should only be a temporary measure while the more fundamental, long-term pro-consumer initiatives are taking effect, that the Relative Cap should be introduced with a ‘sunset clause’, so it comes to an automatic halt unless it is deliberately and explicitly renewed at the end of its predetermined life. This will prevent a temporary measure from becoming permanent by default. The sunset clause should apply no more than a year after the last of the pro-consumer initiatives described above has been completely implemented.”

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