Can energy companies take a £1 billion hit?

The idea of free markets is that competition keeps prices low and companies honest.

There's general agreement that competition in the energy market is the wrong side of feeble and today Ofgem, the regulator, moved to protect consumers from paying over the odds for the gas and electricity they buy.

People who switch energy supplier pay less. The price cap is aimed at those who don’t switch and are over-charged by their suppliers as a result.

Will customers who regularly switch suppliers be worse off? Credit: PA

Ofgem believes 11 million households and businesses will be £1 billion better off when it is introduced at the end of the year.

Which, of course, means energy suppliers are facing £1 billion in lost revenues. The Big Six suppliers made £900 million between them last year so, on the face of it, the cap will go some way to wiping out their profits.

But Ofgem doesn’t expect the energy suppliers to go out of business, nor do investors.

Two of Britain’s biggest suppliers, Centrica (which owns British Gas) and SSE, are listed on the stock market. The share prices of both companies rose after the price cap was announced this morning, suggesting it’s less severe than the market expected.

The cap will undoubtedly make selling gas and electricity to home and businesses less profitable in future but there’s still money to be made.

The cap will make selling gas and electricity to home and businesses less profitable in future. Credit: PA

Ofgem expects energy suppliers to offset some of the decline in revenues by becoming more efficient - often a euphemism for laying off staff.

Ofgem says the cap means consumers can be confident they are always paying a fair price for their energy.

The regulator urges consumers to continue to shop around to save money but concedes that switching rates may well fall after the introduction of the cap, and that the price of fixed price deals may rise.

The price cap was announced by the prime minister last October. At the time the government urged Ofgem to introduce it quickly.

The energy watchdog aims to protect those least engaged with changing prices. Credit: PA

Energy suppliers threatened legal action and Ofgem played safe, waiting for legislation to be passed in July. Some will feel the regulator has been too timid.

Ofgem’s price cap is designed to protect the disengaged (often the elderly and/or those on low incomes) from being over-charged.

There’s a compelling argument that those who are engaged and shop around will be left worse off as a result, but the government takes the view that the current situation is so egregious it has to act.