An “absolute cap” is to be imposed on poor-value energy tariffs, but only as a temporary measure that will run until 2023 at the latest, the Government has announced.
In a statement ahead of draft legislation, the Department for Business, Energy and Industrial Strategy (BEIS) said the cap would run initially until the end of 2020, but would be kept under review with extensions possible until the end of 2023.
Ofgem will bring in a cap on standard variable or other default tariffs under the Draft Domestic Gas and Electricity (Tariffs Cap) Bill to help more than 18 million customer accounts in England, Wales and Scotland.
The Bill would require Ofgem to consult and impose the cap “as soon as practicable” after the legislation is passed.
The BEIS Select Committee will be asked to scrutinise the draft legislation to help build cross-party consensus on the workings of the cap as proposed in Prime Minister Theresa May’s speech last week.
The Government said it had taken the step because the energy market “does not operate in the interests of the majority of consumers”, adding: “While we are in favour of free markets, we will always take action to fix them when they’re broken.”
READ MORE: One million households set to benefit from energy price cap
The Competition and Markets Authority (CMA) found that customers of the Big Six energy suppliers on standard variable and default tariffs are paying £1.4 billion a year more than they need to.
The draft Bill follows Wednesday’s announcement by the energy regulator that it is to extend its prepayment price cap to one million more vulnerable households this winter, saving them £120 a year, although it admitted this would not take effect until February.
The Government said it welcomed the action by Ofgem but believed this could go further to protect everyone on default tariffs “from the unfair practices currently seen in the market affecting two-thirds of households in Great Britain”.
Mrs 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.”
Business and Energy Secretary Greg Clark said: “The energy market is broken.
“It punishes loyalty - the independent competition authority found millions of people who are customers of the Big Six suppliers are overpaying to the tune of £1.4 billion a year.
“That is simply wrong. While five million households will see their bills capped from this winter, I want to see every household protected from rip-off bills.
“That is why we have published this draft legislation today - sending a clear message to suppliers they must act to put an end to loyal consumers being treated so unfairly.”
Will Hodson, co-founder of collective switching organisation The Big Deal, said: “This price cap is hugely welcome. Big Six companies have been overcharging their most loyal customers for years and years.
“The temporary nature of the cap is fine for now but it’s important that the Government is willing to extend the cap and even make it permanent if the Big Six companies don’t mend their ways. The challenge is now for suppliers, and switching sites, to find new ways to prevent British consumers from being ripped off.”
Alex Neill, Which? managing director of home products and services, said: “For millions of consumers worried about their energy bills, a cap might sound like a positive move.
“However, the Government must guard against any unintended consequences that undermine customer service and push up prices as a whole. As it will take some time to come into effect, customers sitting on expensive standard variable tariffs should switch now.”
Richard Neudegg, head of regulation at uSwitch.com, said the Government was “sending out completely the wrong message” by suggesting that a price cap will improve the retail energy market.
“The Government cannot have it both ways. This intervention will remove the most effective weapon in keeping prices down - competition. Instead it should focus their efforts on widening access to the Warm Home Discount for vulnerable households.”
READ MORE: Nicola Sturgeon announces publicly owned energy compan
Citizens Advice chief executive Gillian Guy said: “The runaway costs of default energy tariffs need to be tackled, and this draft Bill is an important step towards an energy market that works better for consumers.
“We agree with the Government that an absolute cap is a better option than a relative cap, and will help to ensure the market remains competitive so that consumers who shop around can still get a good deal.
“However, a cap on prices isn’t the end of the story when it comes to fixing the broken energy market, which is why it is vital that Ofgem takes into account the need to protect vulnerable consumers, encourage efficiency, and incentivise switching when it sets the cap. This is particularly important given the temporary nature of the measures.”
Former minister John Penrose, who helped to organise a cross-party campaign to cap energy bills for 17 million families which had the backing of 76 Tories, said: “The Prime Minister was absolutely right to reaffirm our promise to protect 17 million households from rip-off energy bills with a price cap in her conference speech last week. It’s great that we’re moving on to think about how, rather than if, we make it happen.
“A temporary relative price cap puts the customer in charge, so energy firms compete to offer the best, most creative and attractive deals. An absolute cap would throttle competition, be out of date as soon as the wholesale price of gas goes up or down, and energy firms would spend more time lunching their regulators than delighting their customers.”
The Government rejected the idea of a relative cap, which would have set a limit on the difference between a supplier’s cheapest and most expensive deals, in favour of an “absolute” alternative, which will work along the lines of the cap introduced in April to set prices for households with pre-payment meters.
British Gas owner Centrica saw its shares come under pressure once again after the cap announcement, falling by more than 1% on the FTSE 100 index.
But SSE was 1% higher, having already seen its shares tumble last week after Mrs May’s speech.
Michael Lewis, chief executive of E.ON UK, said: “A price cap will not be good for customers; it will reduce engagement, dampen competition and innovation.
“As we have made clear, we believe standard variable tariffs (SVTs) have had their day. That is why we are taking action to make that happen for our customers. For example, we recently announced our plans for a unilateral move away from SVT in tandem with the advanced rollout of smart meters - a way to make a real difference in the market rather than a blanket cap that ultimately won’t benefit customers.
“We will, of course, also look at the detail behind the Government announcement today but remain utterly convinced that increased engagement in the energy market is the best way forward for all customers and changes to make this a reality are already happening.”