The Big Six is exposed but could sustain the proposed energy tariff cap

24th October 2017 | Recycling

During her speech to the Conservative Party conference on October 4, 2017, Prime Minister Theresa May announced plans to cap Standard Variable Tariffs (SVT).

The most common tariff provided by UK energy suppliers, SVT is the default rate applied once a customer’s fixed term ceases, and its price fluctuates according to the Bank of England’s base rate.

This created concern on the market about the future ability of these companies to generate cash flow.

But will the cap harm the Big Six – British Gas, SSE, EDF, Scottish Power, Innogy and Eon – as severely as initially thought? In our view, this is obviously not good news, but even the most exposed of the Big Six should be equipped for change. Understandably a cap will put pressure on suppliers’ cash flow – but this could be offset by lowering operating expenses, capital expenditures (capex), and adjusting respective financial policies. In turn, the largest players’ credit rating may not be altered immediately after the cap’s introduction, which is expected to materialise during 2018 at the earliest.

Energy Tariff Cap

With 14 million UK households operating under SVT’s, their rising number has been singled out as a potential cause of the UK energy market’s inefficiency. This is because SVT customers are less inclined to switch to more competitively-priced providers than those on other tariffs.

The policy proposal follows a two-year inquiry by the Competition and Markets Authority (CAM), which calls for further measures to foster energy market competition. In July 2017, Ofgem, the UK regulator for gas and electricity responsible for implementing the measures, announced that it would act beyond the CMA’s recommendations. In addition to measure that ease customers’ ability to switch providers, tariff caps were also introduced for households with prepayment meters.

The problem, however, is that Ofgem will not implement a ceiling on all energy tariffs without legislative consent. The Prime Minister’s draft bill, presented to parliament on 12 October 2017, aims to provide the necessary framework for Ofgem to proceed.

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