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Four million households on pre-payment meters are to benefit from a temporary price cap which will reduce bills by around £300 million a year, the Competition and Markets Authority (CMA) said.

In its final report on a two-year investigation into the energy sector, the CMA also said there would be an Ofgem-controlled database of consumers who had not switched recently to allow them to be contacted by other suppliers for the best deal.

The competition watchdog warned that 70% of people were on the more expensive “default” standard variable tariff, costing consumers £1.4 billion more than a competitive market.

The figure has been revised down from the £1.7 billion overpayment the CMA claimed when it published its provisional plans for the energy market in March.

The CMA said suppliers would be ordered to give energy watchdog Ofgem details of all customers who have been on their default tariff for more than three years, which will go on to a secure database.

This will allow rival suppliers to contact people by letter and offer cheaper and easy-to-access deals based on their actual energy usage, the CMA said, though customers can opt out if they want.

The price cap for households on pre-payment meters is being introduced because the cheapest tariffs for those customers are currently £260 to £320 more expensive than for people paying by direct debit.

It will remain in place until the introduction of smart meters which will allow customers to access better deals.

Roger Witcomb, chairman of the energy market investigation, said: “Competition is working well for some customers in this market – but nowhere near enough of them. Our measures will help more customers get a better deal and put in place a modernised energy market equipped for the future.

“With far too many customers paying hundreds of pounds more than they need to, they will be alerted to the better value deals that are out there and it will be easier for them to identify a good deal and switch to it,” he said.

“For those customers on pre-payment meters, whose options to switch are far more limited, we’ll cap prices until the time that they too can benefit from competition.”

As part of the changes, the CMA is recommending Ofgem remove some of its rules, including the “four tariff rule” which limits the number of different deals suppliers can offer.

Ofgem should also allow price comparison websites to negotiate exclusive deals with suppliers, rather than having to offer all deals, which the CMA said would help increase competition and drive down energy prices.

There should also be changes in the way that the Department of Energy and Climate Change (Decc) awards subsidies for low-carbon power to make sure customers get the best deal , it said.

Responding to the publication of the CMA’s final report, Dermot Nolan, chief executive of Ofgem, said: “The CMA’s final report marks the end of its two-year investigation and is an important milestone towards making the market more competitive and fairer.

“The CMA’s remedies, combined with smart meters and faster switching, clear the way to secure a new and better deal for all consumers, especially the vulnerable.

“Ofgem urges the industry to get behind the entire package of remedies and to work with us to deliver an energy market that works for both active and disengaged customers as quickly and effectively as possible.”

 

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