A price cap – is that the best on offer?

9th Oct 2017

 

So the Prime Minister told the energy suppliers there is going to be a price cap on bills. It will stop future price rises but is that the best on offer?

What was ridiculed back in 2013 is now offered to the British public as a way of helping them – in the same week that the Government issued a press notice that UK domestic bills were internationally low. It doesn’t strike me as joined up thinking, but my real criticism is the lack of ambition, is this the best on offer from both our major political parties?

So here’s my two-pence worth, a way of changing energy prices to benefit the least well-off; penalise excessive use (acting as an incentive to save energy) and if the Big Six are reading this – barely touching their bottom line.

Using British Gas, standard variable tariff, the target of much criticism I’ve played with the numbers. Currently for gas, the unit price is 4.01p per kWh with a standing charge of 26.01p per day. Using Ofgem’s “Typical Domestic Consumption Values”, low users 8000 kWhs, median 12,000 and high 17,000 – we can see the impact on households of a simple change. Remember that Ofgem also state that low energy use is associated with low incomes and vice versa.

If we calculate the median gas bill, we get £94.94 standing charge and £481.20 for usage, a total bill of £576.14. This equates to an average of 4.8p per kWh. Now scrap the standing charge and use this revised rate to all users. Instead of a low user paying £415.75 (£94.94 standing plus £320.80 usage) they now pay £384. The high user did pay £776.64 (£94.94 plus £681.70) they now pay £816. The average users sees no change – a price freeze if you like.

So the lower energy user (associated with low income households) saves £32 (nearly 8%) and the higher user (and better-off household) pays an extra £39 (or 5%). Importantly the market sends a clear signal that it pays to save energy and for the suppliers, they earn the same income. Progressive, forward-thinking and yet fair for the suppliers – I guess it’ll never catch on.