Pure Planet gets Ofgem exemption from price cap extended

pure planet logo

Renewable energy supplier Pure Planet has succeeded in getting its exemption-of-sorts from the government’s energy price cap extended. Read on for Selectra’s analysis.

What is the energy price cap?

The energy price cap is a limit on the amount suppliers can charge per kilowatt hour (kWh) of electricity or gas and was introduced by Ofgem to protect energy consumers on a default or standard variable tariff (SVT).

These tariffs are often not actively chosen by customers because they haven’t looked into finding a better deal and have accepted the default or, in other cases, because their supplier has moved them onto a default rate after a fixed-term tariff has expired.

Ofgem’s price cap is applied in the following circumstances:

  • To customers with prepayment meters
  • To customers who get the government’s Warm Home Discount
  • and/or to customers on a SVT or a default tariff they haven’t actively chosen

When Ofgem changes the cap, energy suppliers must reduce their prices to keep them at or below the level it sets. So if you’re on a tariff priced above the new cap, your supplier must lower their tariff and you will save money.

The capped tariff depends on a number of variables including whether you pay by direct debit or not, what part of the country you live in and what type of meter you have.

Not everybody is covered by the caps. Ofgem says approximately 11 million customers on default tariffs and 4 million on prepayment meters benefit from the scheme.

The cap is currently set at £1,179 until March 2020. Amounts reported in the media are usually based on an average consumer with a typical energy consumption paying by direct debit. It is not a limit on the amount you can be charged on your bill as this of course still depends on how much you use.

Why did Pure Planet ask for an exemption?

Pure Planet is the only UK energy supplier using what it calls a “membership fee model”.

Almost all energy suppliers make their profits from marking up the price of energy and additional standing charges billed to customers.

Pure Planet promises its customers that it’s a “no mark up” supplier. The company’s per-unit price is calculated to cover only the wholesale energy price along with other costs it can’t avoid, including energy transport, government levies, green taxes and VAT.

Instead, it charges a membership fee, currently £8.00 a month for electricity or £16 for dual fuel, which is where the supplier gets its profit from. In reality, this is simply a higher-than-normal standing charge rebranded to make it sound a bit sexier.

The firm is also somewhat unusual in that it only offers its customers one variable tariff.

Pure Planet has successfully argued that the cap shouldn’t apply to it due to the unique business model it uses.

The exemption, officially called “directions for alternative compliance assessment”, was first granted to Pure Planet in January 2019 and the new extension allows the firm to continue with this model until September 2020, as long as the supplier fulfills certain additional obligations set down for it by Ofgem.

How does Ofgem decide suppliers are following the rules?

The regulator has two methods to monitor how well suppliers are following its directives.

The first method looks at standing charges and the per-kWh of energy to see if they are level with or below the price cap rate.

energy price changes

The second option Ofgem has is to compare the total cost for a customer’s usage level with a supplier against the total cost on the price cap tariff and check if it is equal or below that total.

Ofgem typically uses the first method, so Pure Planet’s problem was that its standing charge/membership fee means that a small number of its customers with low levels of energy usage are paying more than the price cap allows, although the vast majority of customers would not pay more than the price cap tariff.

Pure Planet also argued that because they offer only one tariff the definition of 'default' or 'standard variable' tariffs doesn’t properly apply to its business model and because almost all customers have actively chosen it when switching to the firm.

The legislation governing the cap allows Ofgem to exempt suppliers from the default tariff cap if the tariff has been actively chosen by the customer and if it supports the production of renewable energy.

While agreeing to allow the supplier to continue business as usual until September 2020, the regulator reminded Pure Planet that its exemption comes with additional obligations:

  1. The number of low-usage customers affected by the higher standing charge must be kept as low as possible. Ofgem confirmed that it was satisfied the supplier has been meeting this condition so far.
  2. Customers who have been overcharged should be refunded the difference within 30 days of the end of a price cap period. Ofgem said this condition had not been met to its satisfaction. Pure Planet has renewed its promise to customers that it will credit them with any amount in excess of the cap at the end of each price cap period.
  3. The third condition set by the energy regulator was that the company should point customers to more suitable tariffs if they were not getting the best deal for their needs. Ofgem stated that it was not satisfied with Pure Planet’s performance in this area either. Given the company only offers one tariff this means potentially sending customers to competitors, so its failure to meet this obligation is somewhat understandable.

Ofgem said that the extension could be seen as a way for Pure Planet to either show it can meet all the conditions successfully and apply for another extension by June 2020 or, if it cannot meet the conditions, it has time to change its business model to comply with the energy price cap in line with other companies.

Do other suppliers get exemptions?

Ofgem does have some flexibility when it comes to the price cap and Ecotricity, Good Energy and Green Energy UK were given permanent exemptions from the price cap for their SVTs.

These suppliers had argued that, because of their investment in and direct purchase of green energy, their SVTs were necessarily higher than those allowed by the price cap.

What’s more, as their customers had chosen them specifically to support clean energy despite the higher prices, they should be given a permanent exemption, known as a derogation, from the cap.

However, given Pure Planet’s position as a mid-range supplier that might not be a strategy it decides to adopt.

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