The prospect of an energy price cap has been weighing on the big six energy suppliers for months now. Most recently it reared its head in the form of a draft bill from the Department for Business, Energy and Industrial Strategy, which proposed a temporary cap on the much-maligned standard variable tariff (SVT). In that context, it is understandable that energy majors Centrica (CNA) and SSE (SSE) would seek to regain control over their fortunes.
Centrica has unveiled a series of plans to reform its retail operations. Its proposals were suitably bold: withdrawing the SVT entirely for new customers in favour of fixed-term tariffs, beefing up product lines and looking to increase engagement and reward loyalty from customers, including reaching out to those who were on a legacy SVT scheme specifically with new offers. It also said it would simplify bills to aid switching and committed to improving customer services and overall efficiency.
On a wider scale, the company – quite self-importantly – put together a series of proposals for the government and industry regulator Ofgem. These are consistent with much of what outspoken Centrica chief executive Iain Conn has been saying in interviews in recent months. The group called for the end of the SVT altogether, along with all tariffs without an end date, measures to facilitate smart meter and prepayment meter roll-out and steps to change the “prescriptive nature” of customer bills.
The proposals take particular aim at the cost of energy policy, calling for it to either be shared among all suppliers or met from general taxation rather than through consumer energy bills as it is now. At present smaller energy suppliers are exempt from charging customers for various social and environmental policies. Ofgem data as of August 2017 shows environmental and social obligation costs make up 8 per cent of the average dual fuel bill.
Earlier this month, SSE appeared to have all but given up on the UK’s domestic supply market, announcing its intention to spin out its household energy supply division to be combined with big six rival Npower. While SSE shareholders would retain ownership of 65.6 per cent of the merged business, the move hints at a distaste for the household energy market, especially given management’s plans to hold on to the business supply division.
Implementing these measures would hurt margins at Centrica, according to analysts at RBC Capital Markets, although they add that they “must make a price cap less likely”. Given RBC’s previous estimates that a price cap could cut as much as 30 per cent from Centrica’s 2018 EPS, even self-flagellating action that reduces the likelihood of a cap seems prudent.
