Centrica to Challenge Government Price Cap

Owner of British Gas, Centrica, are mounting a legal challenge against Ofgem’s price cap, arguing that the level has not be calculated fairly.

They are seeking a judicial review of the way Ofgem has calculated the figures of the price cap, although they admit this will not change the implementation of the cap at British Gas. In a statement, Centrica said:

“Through this action Centrica has no intention to delay implementation of the cap, and does not expect the cap to be deferred in any way,”

Specifically, Centrica are looking to challenge the way in which Ofgem have treated the suppliers ability to recover wholesale energy costs when calculating the cap level.

In response, Ofgem have said that they conducted a thorough consultation on the decision and believe that the cap has been set fairly for the consumer and for suppliers. They stated that they will defend their decision ‘robustly’.

Costing British Gas £70m

The cap, which came into force on January 1st,2019, will prevent a dual fuel customer from being billed more than £1,137 a year for average energy use. This is £68 less than an average bill for a customer on British Gas’s standard variable tariff.

As a result, Centrica have said that the operating profit of British Gas will be reduced by an estimated £70m in the first quarter of 2019.

In a  trading update from Centrica , chief executive Iain Conn said that the company was looking likely to achieve its financial targets for the year, despite what he called ‘strong competition’ and ‘regulation in energy supply’. Speaking in the update, he said:

"Maintaining a focus on performance delivery and financial discipline and demonstrating resilient cash flows remain our objectives for 2019 and beyond, as we deal with the impact of the UK energy supply default tariff cap"

British Gas currently have 3.1 million customers on their standard variable tariff (SVT), down from 4.3 million at the start of 2018. They also have around 500,000 customers on their lower priced fixed term default temporary tariff, who would also be affected by the pricecap.

Referring to the price cap, Conn commented that:

“Ofgem’s revision to the methodology for calculating supplier wholesale and hedging costs during the transitional period, and our inability to retrospectively mitigate this change, is expected to result in a one-off negative adjusted operating profit impact of around £70min the initial period of the cap in the first quarter of 2019.”

Likely to rise anyway

Although Ofgem are defensive of the means with which they arrived at the cap figure, they have also admitted that they fully expect the level to rise when it’s reviewed in April 2019. As with other pricing initiatives, such as the Safeguard Tariff, Ofgem will review the cap level twice yearly.

Rising wholesale costs of gas and electricity will initiate a rise in the cap, to ensure suppliers can remain profitable in the face of higher operating costs. However, many suppliers have argued that it’s not enough to ensure their financial security.

As with any regulatory changes, they can take time to filter through. Ofgem have previously said that they expect any adjustment to be identified and implemented within 8 – 12 weeks of the review date. For suppliers, that sounds like a long time.

Wholesale gas and electricity prices can change dramatically over very short periods, meaning a supplier may have to cope with higher costs for several weeks both before and after the review before they can change their tariff. While larger energy suppliers may have the means to absorb such costs, the consequences for smaller companies could be disastrous.

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