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Will the energy price cap affect businesses?

Theresa May’s speech at the Conservative Party Conference in Manchester will more likely be remembered for coughing fits and prankster interruptions than policy announcements. But the rebirth of one policy caused old debates to ripple through the energy industry. Advocates say that it is a much-needed intervention in a broken market, but others argue that the cap would reduce competition lead to the cheapest deals being withdrawn. While the price of energy affects everyone at an individual level - business leaders are interested in what effect, if any, the price cap will have on businesses.

Price cap for businesses?

The Prime Minister’s price cap announcement did not directly implicate businesses. Her conference speech focused on the impact on vulnerable consumers whose misguided ‘loyalty’ was being punished. “And one of the greatest examples in Britain today is the broken energy market,” Theresa May said. She continued: “The most loyal customers are often those with lower incomes: the elderly, people with lower qualifications and people who rent their homes. Those who for whatever reason, are unable to find the time to shop around.” The speech contained little ‘meat’ of the policy. The party’s 2017 manifesto contained more information about the policy. It is important to understand how the final policy could look if we are to understand the direct and indirect effects it could have on businesses. “Energy suppliers have long operated a two-tier market, where those constantly checking for the best deal can do well but others are punished for inactivity with higher prices. “We will introduce a safeguard tariff cap that will extend the price protection currently in place for some vulnerable customers to more customers on the poorest value tariffs … the safeguard tariff cap will protect customers who do not switch against abusive price increases.” We can gleam three key points from the policy details here and elsewhere.
  • The bill will give the regulator Ofgem the power to impose a cap on standard variable tariffs across the whole market. Standard variable tariffs account for a large part of the market
  • It will be up to Ofgem to set the level of the cap
  • This measure is intended to be temporary, until "innovations such as smart meters arrive and enable the market to work properly for everyone"
The manifesto only contains one sentence relating to the price cap and businesses. It reads: “As part of broader reforms to the business energy market, we will consult on how to extend our safeguard tariff cap to micro-businesses.” Micro-businesses however, likely already purchase energy from domestic suppliers anyway so the impact of this will be minimal. So, what could the indirect impact on more substantial businesses be? If they are instituted poorly, price caps can limit competition because suppliers often withdraw cheaper deals to recoup losses on the more expensive tariffs. The boss of British Gas-owner Centrica, Iain Conn, has already warned that price caps could mean the end of the cheapest deals. This may be an exaggeration. Energy companies will always be motivated to undercut each other to try to win more customers. But aggressive price wars can quickly wipe out energy company profits and, in extreme cases, could result in energy companies failing. A similar price cap, imposed in the 1990s in California caused rolling blackouts and the bankruptcy of major energy providers. This could have a knock-on effect on businesses who purchase energy from the same providers that serve the domestic market. So far it is not clear what form the price cap will take. The final result is likely to be negotiated by Ofgem and may be less wide-ranging than current comment suggests. On the whole, businesses are likely to be insulated from the effects of the price cap.

Published by Utility Helpline on