Commentary on provisions of the Act
Section 1: Cap on standard variable and default rates
- Subsection (1) requires Ofgem to modify the standard licence conditions for gas and electricity suppliers, so as to include conditions ("tariff cap conditions") that impose a cap on the rates that may be charged for certain tariffs offered to domestic customers. Ofgem must do this as soon as practicable after the Act is passed.
- The requirement for tariff cap conditions applies to standard variable and default tariffs, subject to section 3.
- Subsection (2) provides that Ofgem may amend the tariff cap conditions once those conditions are in place. This could be used, for example, if Ofgem need to change the way that the price cap is to be calculated. The tariff cap conditions must be in place until they cease to have effect under section 8.
- Under subsection (6) Ofgem must seek to protect existing and future domestic customers who pay standard variable and default rates, and must take into account the matters listed at subsection (6) when implementing or modifying the tariff cap conditions. It is for Ofgem to balance each of the matters in complying with this duty.
- Subsection (7) makes clear that Ofgem will not be required to cap certain charges that are not part of regular bills, such as charges for late payment and charges relating to meters.
Section 2: Tariff cap conditions
- Subsection (1) requires, among other things, that the tariff cap conditions set out how the cap is to be calculated. It also sets out where Ofgem has discretion regarding the content of the tariff cap conditions.
- Subsection (2) sets out restrictions on the content of the tariff cap conditions.
- Subsections (3) requires Ofgem to consult on the methodology for how the cap level is to be calculated before introducing tariff cap conditions and gives Ofgem the discretion to undertake subsequent consultations regarding the methodology.
Section 3: Exemptions from the cap
- Subsection (1) provides that the tariff cap conditions do not apply to domestic customers who benefit from the tariff cap under the Energy Market Investigation (Prepayment Charge Restriction) Order 2016. That Order applies to customers who pay for their energy through prepayment meters, subject to the specified exclusions.1 Also, the tariff cap conditions do not apply to domestic customers who benefit from a cap that replaces the cap in that Order.
- Subsection (2)(a) enables Ofgem to exempt from the cap any domestic customers who benefit from any other cap that Ofgem chooses to impose for the purpose of providing protections to vulnerable consumers.
- Subsection (2)(b) enables Ofgem to exempt tariffs from the cap if, or to the extent that, Ofgem considers the tariffs support the production of gas, or generation of electricity, from renewable sources. This exemption can only apply to tariffs chosen by the domestic customer.
- Subsection (3) places a duty on Ofgem to consult on whether and, if so, how to exempt such ‘green’ tariffs. It also clarifies that Ofgem may consult on whether to have a green tariff exemption before or in the course of proposing licence modifications under section 4. Under subsections (4) and (5), Ofgem must conduct the consultation in time to enable it to introduce any exemption at the same time as the tariff cap, or if this is not practicable, to introduce any exemption as soon as practicable after this.
Section 4: Notice of proposed modifications
- Section 4 sets out the steps for the licence modification procedure that must be followed in order to introduce tariff cap conditions. It sets out who Ofgem must notify regarding the proposed modifications and requires Ofgem to consider any representations that are made within the time period specified in the notice. This time period for making representations must not be less than 28 days.
Section 5: Publication and effect of modifications
- Section 5 sets out requirements regarding the publication of modifications. In particular, subsection (4) provides that modifications cannot take effect until after the end of the period of 56 days beginning with the day on which they are published.
Section 6: Review of level at which cap is set
- Section 6 places a duty on Ofgem to review the level of the cap at least every six months and publish a statement regarding whether it proposes to change the level of the cap. As a result of that review it would be open to Ofgem to change the level of the cap. This section does not place a duty on Ofgem to review the methodology for setting the cap.
Section 7: Review of competition for domestic supply contracts
- Section 7 requires Ofgem to review the market for domestic electricity and gas supply contracts, to assess whether conditions for effective competition are in place. This review includes, among other things, the roll out of smart meters. It must then produce and publish a report on this, and make a recommendation as to whether or not it considers that the tariff cap conditions should be extended to have effect for the following year. The Secretary of State must consider the report and recommendation and publish a statement regarding whether the conditions for effective competition are in place. This process applies in the year 2020, and in the years 2021 and 2022 if the tariff cap conditions still apply in those years (see section 8).
Section 8: Extension and termination of tariff cap conditions
- Section 8 sets out the procedure for extending or terminating the tariff cap conditions depending on the statement made by the Secretary of State, as per section 7.
- The tariff cap conditions cease to have effect at the end of 2020, if the Secretary of State makes a statement that the conditions for effective competition are in place. If the Secretary of State makes a statement that the conditions for effective competition are not in place, the tariff cap conditions apply for the year 2021.
- If the tariff cap conditions apply in 2021, the same process takes place in the year 2021 to determine if the tariff cap conditions must apply for the year 2022. And if the tariff cap conditions apply in 2022, the same process takes place again to determine if the tariff cap conditions must apply for the year 2023. However, the tariff cap conditions must cease to have effect at the end of the year 2023.
- Once the tariff cap conditions cease to have effect, Ofgem cannot use section 1 to impose further tariff cap conditions.
Section 9: Protection for domestic customers after termination of tariff cap conditions
- Section 9 places a duty on Ofgem to review the pricing practices of energy suppliers and consider if there are categories of consumers who are paying or risk paying in the future excessive charges for standard variable and default rate tariffs, and for whom protection should be provided.
- The review must also consider whether consumers will suffer an excessive tariff price rise by moving to a standard variable or default rate tariff upon the termination their existing fixed-rate tariff. It must also consider whether vulnerable consumers are in need of protection.
- The review must be conducted before the price cap is removed and Ofgem must conduct such a review thereafter as it deems appropriate.
- If the review concludes that the protections are needed, Ofgem must take action using its powers as set out under the Gas Act 1986 and the Electricity Act 1989.
Section 10: Consequential modification of standard supply licence conditions
- Once the tariff cap conditions cease to have effect, Ofgem may modify the licence to make consequential changes. The procedure for making such modifications is set out in this provision.
Section 11: Amendments of the Utilities Act 2000
- Section 11 sets out consequential amendments to the Utilities Act 2000.
Section 12: Interpretation
- Section 12 defines the terms used in this Act.
Section 13: Extent and commencement
- Section 13 specifies that the Act extends to England and Wales and Scotland and comes into force on the day on which it is passed.
Section 14: Short title
- Section 14 sets out the short title of the Act.