Financial Times

Energy price cap will cut consumer choice, warns Centrica

by Nathalie Thomas and Energy Correspondent, Financial Times

March 16, 2017 | 9:41 am
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The idea that a cap on prices would lead to cheaper power bills for all homes is a “false assumption”, according to Britain’s biggest energy supplier.

Centrica, the owner of British Gas, forecast that power companies would set their prices at, or near, the level of the cap, reducing choice for consumers. “A cap would almost certainly remove choice from the market,” Iain Conn, chief executive of Centrica, told the Financial Times.

“Managing the risk around supplying energy is not for the amateur to play – it is very complex,” he said. “I would worry that if there is price regulation, more companies would find it difficult to manage . . . and would probably go out of business or more companies would say: This market is no longer attractive, therefore, I don’t want to be in it.” There are currently 50 domestic energy suppliers in the UK.

On Thursday, parliament will debate energy prices, led by Conservative MP John Penrose. Mr Penrose is among 50 MPs who are campaigning for a price cap on the “standard variable” tariffs that about two-thirds of households pay, and which tend to be more expensive than fixed tariffs.

Mr Penrose has said that loyal customers are being “systematically ripped off” by big energy suppliers and will call for a “relative” price cap that would forbid standard tariffs that are more than 6 per cent higher than a supplier’s cheapest tariff.

All of the “big six” suppliers – with the exception of British Gas – and several of the smaller suppliers, have raised their standard tariffs this year, leading to warnings from ministers that they are “prepared to act” if the market does not work for consumers. British Gas has extended a price freeze until August.

Mr Conn said that between 2009 and 2016, the standard tariff for British Gas customers who buy both gas and electricity has risen an average of 1 per cent a year. During that period, British Gas’s profit per household has averaged £52.62, after tax, on an average bill of about £1,122 – a margin of just under 5 per cent.

“I actually believe our profitability, which is totally transparent, is a fair, free-market level of profitability,” Mr Conn said.

Between 2009 and 2016, the cost to consumers of government environmental policies, such as subsidies to support the development of renewable energy, has nearly doubled from £69 to £135 per bill, according to Centrica.

It said the cost of delivering power to homes has also risen 54 per cent since 2009, adding £355 to the average bill. This is partly because the National Grid must invest to support the use of intermittent power sources such as wind and solar.

Mr Conn said these costs were a consequence of Britain’s transition to a low-carbon economy and “that nobody wants to talk about but it’s just a piece of reality”.

British Gas has a lot to lose from a price cap. Analysts at Bernstein have calculated that in the first year, Centrica’s operating profits would take a £332m hit.

First Utility, one of the main challengers to the big six, claimed 9m UK homes have been “stuck” on standard variable tariffs for more than three years, each “overpaying” by an average of almost £800 during that time.

 


by Nathalie Thomas and Energy Correspondent, Financial Times

March 16, 2017 | 9:41 am
  |     |     |   Start Conversation

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