Is the energy price cap failing to protect customers?

ITV News Business and Economics Editor Joel Hills has the details of the increase and how it's going to hit families across the country

OFGEM’s decision to increase the cap on energy prices by a record amount and for the second time this year raises inevitable questions about how effective it is proving.The cap was put in place in 2018 to protect the millions of customers who weren’t switching gas and electricity supplier. OFGEM, perhaps unsurprisingly, insists it has been transformative.The regulator calculates that those businesses and households who are either unwilling or unable to shop around for the best deals are no longer being ripped-off and are paying between £75 and £100 less for their gas and electricity than they would otherwise.

Energy companies have certainty felt the impact of the cap.

British Gas’s profit margins have slumped from 6.7% in 2018 to 1.7% in 2020.

OFGEM estimates that E:ON, EDF and Scottish Power all sold gas and electricity at a loss in 2019 and 2020.

OFGEM says it is raising the price cap because there has been a record surge in the wholesale price of gas and electricity over the last six months.

Its chief executive, Jonathan Brearley, insists that some energy companies will fail unless they are able to cover their increased costs.“We can’t ask suppliers to sell energy for less than it costs them to buy,” Breaerley told ITV News. “Profit margins are already close to zero:”

ITV News Business and Economics Editor Joel Hills explains why some energy companies cannot reduce the upcoming price hikes for customers

Of course, not all energy companies are alike.

The likes of Centrica (which owns British Gas), EDF and Scottish Power sell gas and electricity to consumers and also produce it.

All three and are therefore less exposed to changes to the wholesale prices and measure their profits in the hundreds of millions of pounds. It’s fair to ask whether the price cap should reflect this.

Single parent Anthony is worried how the price hike will hit his family

In total, 23 energy suppliers have gone bust since the cap was first introduced, among them Spark, Breeze and GB Energy.

N Power - one of what used to be called the “Big 6” energy suppliers - also went out of business.The Big 6 are now the Big 5 and they are getting smaller. They still dominate the market but their grip is weakening. Last year they accounted for 7 in 10 customers, 10 years ago it was more than 9 in 10.One thing the energy price cap hasn’t succeeded in doing is improving competition in the market, which remains feeble.

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Some consumers are highly motivated and engaged but most aren’t.

Switching rates have risen slightly since the price cap was introduced (20% of customers changed energy supplier last year, up from 17% in 2017) but more than half of all households in the UK are still sitting on some form of Standard Variable Tariff.

The prospect of being up to £150 a year worse off may change that.The idea of capping energy prices was dreamed up by Labour before being mocked and then stolen by the Conservatives.It hasn’t addressed every dysfunction but it has certainly made the market fairer.