This Library briefing paper provides a summary of the UK energy market, a breakdown of the components of energy bills, and details of concerns and reforms in the market, including the tariff caps.Jump to full report >>
The UK Energy Market
The supply and generation of British electricity was privatised from 1989 through the Electricity Act 1989 and the Gas Act 1986 privatised the British Gas Corporation. Following privatisation, customers remained with their ‘regional’ company for electricity and national company for gas. Eventually, as more suppliers became available, consumers were supposed to switch to save money and a competitive market would be established.
Energy bills comprise a variety of costs including wholesale, network, social and environmental, and other direct costs, as well as VAT and supplier profits. These costs can all fluctuate, meaning the drivers of rises and falls in energy bills are complex.
Concern over overcharging
Following concern that the energy market was not working for all customers, the regulator Ofgem referred the energy market to the Competition and Markets Authority (CMA) in June 2014. The CMA report found that customers are overpaying around £1.4bn a year for their energy supply. This is largely because since privatisation, many customers have remained on default tariffs often with the ‘big six’ suppliers, and have not switched, resulting in consumers on poor value deals.
Reforms to the market
The CMA report suggested over 30 new measures to reform the market and increase switching. The recommendations included a price cap for customers on pre-payment meters, which was introduced in 2017. An extension of this cap (which was not specifically recommended by the CMA), known as the safeguard tariff, came into force in February 2018 to protect customers deemed to be vulnerable as they receive a benefit known as the Warm Homes Discount.
The Tariff Cap
Despite not being a CMA recommendation, a wider tariff cap has been a key political issue and price capping appeared in both the Labour and Conservative manifestos in the 2017 election. In October 2017, the Prime Minister Theresa May announced that the Government would publish a Bill to put a price cap on energy bills. On 19 July 2018, the Bill received Royal Assent and became the Domestic Gas and Electricity (Tariff Cap) Act 2018.
On 1 January 2019, the tariff cap for the 11 million customers on default tariffs came into force. The cap is on the unit cost of energy, so prices can still rise if customers consume more. The cap is reviewed twice a year; in February 2019, shortly after the cap came into force, Ofgem announced increases in the levels of the caps, citing an increase in the underlying cost of supplying energy, particularly wholesale costs. In August 2019, Ofgem announced a reduction in the levels of the cap, this time due to falling wholesale costs.
There are mixed views on the cap. Energy UK, the industry trade body, have said the cap could interfere with competition and instead advocate energy efficiency measures. Whereas, Citizens Advice welcomed the cap as a potential “solution to runaway energy costs.”
Commons Briefing papers CBP-8081
Authors: Suzanna Hinson; Paul Bolton