British Gas owner, Centrica, has announced plans to launch a legal challenge against Ofgem’s energy price cap.
Centrica is calling for a review of Ofgem’s new price regulation, stating that the price cap threshold is lower than it should be and that it should be calculated differently to better factor in the wholesale cost of gas and power. Centrica is seeking to “alter the period within which wholesale prices were used to set the cap”.
Originally, Ofgem was going to set the price cap based on the wholesale price of April to September 2018. However, the regulator switched this to February-July 2018. This change, made without consultation, could negatively affect companies economically.
It is believed that Npower and Scottish Power have encouraged Centrica to go forward with the judicial review, though they are not as of yet participating in the legal challenge.
Ministers have cautioned companies in the energy sector that mounting a legal challenging will inevitably damage their reputation. Claire Perry, the energy minister, wrote in a letter to the ‘Big Six’ energy suppliers: “The government will strongly condemn any efforts to frustrate the process of putting the cap in place”.
The price cap is to be implemented on 1 January 2019, and projections show that it will save customers on a default tariff around £80 a year. Overall, this would help prevent £1 billion in overcharging. Centrica, on the other hand, has calculated a future loss of £70 million to its operating profit “in the initial period of the cap in the first quarter of 2019.
Despite being one of the ‘Big Six’ energy firms and boasting more than 12 million customers, British Gas has seen its shares fall dramatically since Iain Conn joined as chief executive. Furthermore, the firm has steadily been losing customers to smaller energy suppliers and have experienced financial troubles as a result.
In a statement published by Centrica, the firm said: “Centrica is seeking judicial review of Ofgem’s decision of 6 November 2018, which related only to the treatment of wholesale cost transitional arrangements and Ofgem’s decision not to investigate and correct its failure to enable the recovery of the wholesale energy costs that all suppliers incur.
“As we have previously said, we do not believe that a price cap will benefit customers, but we want to ensure that there is a transparent and rigorous regulator process to deliver a price cap that allows suppliers, as a minimum, to continue to operate to meet the requirements of all customers.”
In response to the Centrica challenge, Ofgem defended its price cap: “Ofgem carried out an extensive consultation process when setting the price cap and we believe that it offers consumers on poor value tariffs a fairer deal. In the event of a judicial review we would defend our proposals robustly.”
Centrica has been clear that it is not intending to delay the price cap, but is working to “ensure that the tariff cap being implemented by Ofgem proceeds in a fair and workable way”.
