It has announced its provisional decision to adjust the methodology used to calculate its prepayment price cap – which was introduced in 2017 – “in order to better reflect costs”.
The prepayment charge restriction (PCR), expected to reduce customer bills by £300 a year, was a temporary measure intended to remain in place until the end of 2020, by which time the CMA had expected the rollout of smart meters to be completed.
However, the competition watchdog’s review found the conditions of competition in the prepayment sector have not improved since the introduction of the PCR and the rollout of smart meters has not progressed in line with the initial projections.
It has, therefore, made a provisional recommendation to Ofgem to extend the cap of £1,242 a year for prepayment customers beyond 2020 because of the delayed rollout of smart meters.
The CMA’s review also found the PCR is underestimating the costs incurred since its design and introduction, including an increase in smart metering costs – and is therefore updating its calculation of the price cap which could increase prices for customers.
It stated: “Some of the costs that an efficient supplier is expected to bear in supplying prepayment customers have increased to a level materially higher than that reflected in the PCR methodology.
“As a result of the change of circumstance relating to policy and pass-through smart metering costs, our provisional conclusion is that the PCR is no longer effective in meeting all of its aims, due to underestimating the costs incurred by efficient suppliers.
“While we consider the PCR has been meeting its principal aim of mitigating consumer detriment, we note that, where the PCR was set too low, this would present the risk that suppliers reduce service levels to prepayment customers, competition is materially reduced, and suppliers may be forced to exit the market. Taken together, we consider that this means that the Order is no longer appropriate and needs to be varied.”
The competition watchdog is now consulting on the provisional decision until 8th July 2019.
Ofgem welcomed the CMA’s decision to change the price cap methodology, which it believes “seeks to better reflect the true cost of providing energy to customers on prepayment meters”.
A spokesperson added: “This ensure the market offers choice and protection to prepayment customers both now and in the future. Under the default and prepayment meter price caps, households are protected and will always pay a fair price for their energy and not be overcharged.
“If approved, the new prepayment meter cap level methodology will be reflected in the next cap period coming into effect in October, which Ofgem will announce in August. Alongside the price caps, we are continuing to work with government and the industry to deliver a more competitive, fairer, greener and smarter energy market that works for all consumers.”