The government's new energy proposal explained

• 13 October 2017
• Posted in: Energy & Environment

Newly-proposed legislation by the government could see the energy bills of 11 million households capped for up to five years, which it claim this will save people up to £100 a year. The draft also implies the cap will be absolute. Some MPs advocated a relative cap, designed to limit a supplier’s most expensive tariff to a percentage above their cheapest deal but this has been ruled out.

However, energy regulator Ofgem said that the proposal will likely receive a large delay. Passing legislation could take up to a year, plus another five months for Ofgem to impose the cap (i.e. in 2019). Ofgem will have to wait for the legislation to come into effect to make changes to standard variable tariffs as energy companies can more easily challenge Ofgem without legislation in place giving it more power. Moreover, Ofgem will need to consult energy companies on how the cap is calculated, the government said.

However, in the meantime, Ofgem are putting a price cap for one million low-income households. This aims to ensure that the “price they [consumers] pay reflects the underlying costs of supplying their energy.” It will save affected households £120 a year.

To address the long-standing market failure by the ‘big six’ (British Gas, EDF, npower, E.on, Scottish Power and SSE) who own 90% of the UK market share, Prime Minister Theresa May said: “I have been clear that our broken energy market has to change – it has to offer fairer prices for millions of loyal customers who have been paying hundreds of pounds too much. Today’s publication of draft legislation is a vital step towards fixing that, and in offering crucial peace of mind for ordinary working families all over the country.”

The cap has received criticism by certain experts who argue that, though it will lower the most expensive tariffs, it may well raise the bills of households on the cheaper deals. Smaller suppliers like First Utility claim that the big six are to blame for the cap, keeping “millions of people on standard variable tariffs.”