This was introduced in January 2019 following the passing of The Domestic Gas and Electricity (Tariff Cap) Act 2018. It sets out our overall thinking on various alternative policy models that could succeed the price cap. We then provide an overview of the possible advantages and disadvantages of eight different models, many of which are not mutually exclusive and can be used in combination.
Initially, we thought the increase could be short-lived, due to the large cap level increase announced in February. There is limited public awareness of the cap and an incomplete understanding of what it does. Despite its importance to the industry policy debate, recent polling for Citizens Advice and Ofgem found that only 20% of customers had heard of the wider limit, and fewer (15%) had both heard of it and understood how it worked7.
Those who shop around will likely be able to beat the price of any recoil protection. It is important to be aware of any potential for adverse unintended consequences on the relevant segment of the market that may result from intervening to protect or assist the disconnected. Some of the key arguments for wider and narrower intervention are summarized on the next page.
Our discussions with industry, government, Ofgem and other stakeholders and their publications show that there is a wide range of ideas about what could replace a price cap.
Some form of continuing price cap 2. Mass opt-out collective switching
Setting up a backstop supplier offering fair prices, that disengaged consumers would be moved to
Opt-in collective switching, with much stronger nudges and/or support to try and improve take-up
Social tariffs 8. Do nothing
Key choice two
What approach to take?
While some have been piloted (such as opt-in collective shifting) or are already live (such as the cap itself), others would require additional design and implementation work. This timeline suggests indicative dates for discussion of the earliest year any of the remedies could be in place, taking into account the extent to which the option has been tested and the likely level of implementation difficulties.
Timescales for implementation
There are an extremely broad range of wider industry reforms
The wider context
Continuing price cap
How this would work
Strengths / opportunities
Weaknesses / risks
- Mass opt-out collective switching
- A backstop supplier
- Opt-in engagement measures, with enhanced support
- Reforming the current universal supply obligation
- A price to beat
- Social tariffs
Without the explicit participation of consumers, you don't know what they want, and there may be a legitimate good. There may be inefficiency costs associated with allowing incumbents to shrink very quickly (e.g., customer service functions built for millions that now only serve hundreds of thousands), or challenger brands that expand very quickly (e.g., maybe they will not cope or serve vulnerable consumers well). There are duty of care issues that would need to be resolved in relation to failed transfers or where consumers are transferred to a supplier that cannot offer a good service.
It can be argued that this approach is in effect much more interventionist than the price cap. If applied most widely, this approach could threaten the continued operations of the larger suppliers, possibly forcing some out of business. These offers can be generated through collective conversion, by highlighting the best existing offers on the market, or both.
This can be coupled with enhanced "handholding" to try and reassure consumers and make it as easy as possible to complete the transaction. This approach is now widely tested and comes with low risks of side effects. It is highly scalable and can be used simply to target long-term disengaged and vulnerable groups, or much wider.
Outgoing Ofgem chief executive Dermot Nolan has noted in the past that some form of liaison service may be needed to help vulnerable consumers; this approach can therefore be consistent with regulatory thinking. Although trialling this approach has resulted in a significant increase in engagement levels compared to the general population, it has so far only resulted in a minority of consumers switching. Provider data shows that those who opt out of marketing are more likely to be disengaged, and if this issue is not addressed, there may be incentives for providers to encourage customers to opt out of marketing.
These issues may be difficult to overcome in the current data privacy framework – even through legislation. For example, even if a supplier wanted to be an advance payment specialist, they should be able to offer credit payment terms. The hypothesis that a joint BEIS/Ofgem paper sought to test last summer is whether consumer engagement and outcomes could be improved by removing suppliers' obligations to serve all customers and/or allowing certain license conditions to be switched off for some suppliers , in order to enable specialization.
From a government and regulatory perspective, this approach appears to be relatively light and can be simple to implement and operate. Industry may be unlikely to want to do this if the government or Ofgem are likely to implement alternatives.
Our wider work on social tariffs
Do nothing
When the PPM and wider caps end, there would be nothing to replace them either. It is possible, but far from guaranteed, that ongoing initiatives, such as the introduction of faster switching and half-hourly billing for domestic use, will be separated. Could lead to better customer service outcomes for consumers served by the largest suppliers than many of the other options because they would be under less cost pressure.
A return to something resembling the status quo before the introduction of price caps is likely to lead to similar results. While the number of switchers has increased in recent years, it remains the case that most consumers are disengaged – and those in vulnerable situations are especially disengaged. It is therefore likely that most consumers would be worse off under this model.
Combining options
What’s next?
Your views
Good quality, independent advice
