Guaranteed cheapest energy tariffs: fact or fantasy?

Guaranteed cheapest energy tariffs: fact or fantasy?

CategoryArticles Author Rose Grogan Date

You may remember that in late 2012, David Cameron made a surprise announcement which hit the news headlines that he would use the energy bill to force all energy companies to put their customers on the lowest tariff. The announcement was a surprise to more than the opposition, when it was revealed that neither Ed Davey nor David Cameron’s advisers knew that he was going to make the pledge.

Earlier this month Caroline Flint MP Shadow Secretary for Energy and Climate Change, accused Cameron of breaking his promise. The pledge has not clearly made it into the Energy Bill. The Bill gives the Secretary of State the power to modify the conditions of licences under the Gas Act and Electricity Act. This power may be used for the purpose of requiring energy providers to change domestic tariffs so as to reduce the costs of gas or electricity to their domestic customers. These modifications (contained in clauses 121-122) may:

Require licence holders to provide information about domestic tariffs, including information to enable to comparison of different tariffs provided by the licence holder or another licence holder.
Specify a limit on the number of domestic tariffs a licence holder may adopt.
Require licenced holders to change the domestic tariff, or other supply contract terms on which it supplies gas or electricity to a domestic customer, by switching to different terms or offering a customer a change in tariff.

This is not quite the same as requiring energy companies to put all of their customers on the lowest tariff available, although the final modification could be used to that effect. The government has obviously left itself room to manoeuvre given the frosty reception from energy companies and commentators.

Caroline Flint’s objection to the proposal, widely echoed, is that this is an imperfect market in which energy companies are likely to put the prices up on all their tariffs, leaving little or no benefit to their customers. Energy companies have already statedthat a “lowest tariff” scheme would be paid for by raising the basic price for energy.

It is not only those with vested interests against the plan. Economists expert in the energy market say that a single price or lowest price obligation stifles competition. It will tend to lead to companies offering only higher, not lower tariffs. It is also a matter with some history, with Ofgem removing the original ‘non-discrimination’ licence condition in 2010 (which ensured that energy companies charged the same mark-up in different areas). More recently, Ofgem has aimed to increase transparency for consumers to create a better functioning market.

We will have to wait and see whether the powers contained in the Bill make it through in their current form and, if so, whether they are put to any use. What seems clear is that the lowest tariff pledge is unlikely to be front and centre of government energy policy in the near future.

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