Let’s be generous to the Ofgem chief, Dermot Nolan. He’s produced a respectable fudge, as he was told to. Parliament gave him the tricky job of setting an energy price cap at a level that prevents “rip-off” pricing but still encourages customers to switch suppliers, goals that pull in opposite directions. A figure of £1,136 – being the proposed upper limit for a standard variable tariff for a typical dual-fuel customer – looks as good a stab as any.
It’s slightly embarrassing that the average saving of £75 for punters on default deals is lower than the £100 that Theresa May had unwisely trumpeted. But wholesale energy prices move all the time, so the more relevant figure is the overall savings to consumers, which Ofgem put at £1bn, or slightly more than the big six made in profits last year. Think of the price cap, then, as a command to companies to shed costs, meaning jobs.
The obvious danger is that suppliers also whack up the prices of their fixed-price tariffs for active switchers. If all prices end up clustering around the Ofgem-mandated maximum, even the current feeble state of competition will evaporate. The test will be levels of switching. Last year 17% of customers moved. If the rate plunges from that level, this supposedly temporary exercise will be a flop in its own terms.
Will it even be temporary? The official script says the price cap will stay until 2023 at the latest while Ofgem develops policies “to make the energy market more competitive and work better for all consumers”. Since Nolan’s predecessors comprehensively failed on that score, it’s asking a lot to believe a magical formula will now appear. Note that neither Ofgem nor the government has defined the criteria for lifting the cap, which is an enormous oversight. One suspects price caps could last longer than advertised at the outset.
If so, some will applaud since it’s definitely true that the big six invited intervention by gouging their inattentive customers. But it is also entirely unproven that price caps will act as the intended sharp shock that “resets” the market. They may just produce a different sort of muddle that satisfies nobody – certainly not customers who followed the sound advice to pay attention and shop around.
Melrose in a hole over GKN spend
“No black holes found,” reported Melrose after five months of owning GKN. The Melrose gang generated huge controversy with their £8bn hostile takeover of the former FTSE 100 automotive and aerospace group but they tend not to miss details. If there were a black hole to find, they would have spotted it by now. The shares rose 3% even though it will be at least 18 months before one can judge Melrose’s performance on the biggest (by far) turnaround it has attempted.
There is, though, a hole that we already knew about: the costs of doing the deal. Transaction costs totalled £126m in Thursday’s half-year figures, of which only £54m related to charges on bank borrowings. The bulk of the rest comprised fees to assorted lawyers, accountants and City advisers. In mitigation, one could say there was a large success-related element, a plea that was not available to the GKN side, where £107m was clocked up during an unsuccessful defence. The money-pot for advisers isn’t fresh news, but the figures remain astonishing.
Help to buy – a boon for chief executives
One extension to help to buy, introduced by George Osborne in 2013, is not enough for the housebuilders. They’re already lobbying for another, to take the scheme beyond 2021. This is entirely unsurprising given that subsidies for house-buyers have had a wondrous effect of builders’ profit margins.
But at least Greg Fitzgerald, the boss of Bovis Homes, realises the game changed when the Persimmon chief, Jeff Fairburn, got a £75m bonus from an incentive scheme pumped up by help to buy. Any extension, says Fitzgerald, is bound to come with rules “to stop you bastard chief executives earning all this money from government subsidies”, as he puts it. Let’s hope so. After the Persimmon fiasco, anything else would be a disgrace.
