Four million households on prepaid energy tariffs will see prices temporarily capped and energy suppliers will be forced to open up customer databases to allow rivals to offer those on standard tariffs better deals, under wide-ranging plans to reform the energy market announced today.

A long-awaited report from the Competition and Markets Authority (CMA) concludes that energy users could be overpaying on bills by around £1.7 billion a year. It also sets out a series of proposals to boost competition among suppliers. To see if you can save by switching, use our free Cheap Energy Club.

The proposed cap on prepaid tariffs would apply between 2017 and 2020, and it's estimated this could cut average bills by around 8%, or £80 to £90 a year.

Other proposals in the report include the removal of the 'four tariff rule' – which restricts suppliers to only offering four different energy tariffs at any one time – and strengthening the ability of price comparison sites to offer customers better deals.

But the CMA stopped short of calling for a blanket price-cap on all standard tariffs, arguing this would "give customers even less incentive to seek better deals, and all suppliers would be under less pressure to drive prices down".

'If you don't act, you will pay a fine for apathy'

Martin Lewis, founder of MoneySavingExpert.com, says: "This report finally admits that not everybody can have cheap prices when you've a market based on competition. Politicians' rhetoric and the practical realities have never matched up. If you want to encourage switching you need big price differentials, which means some people will pay hundreds more than others for the same energy use deal.

"The CMA has gone with the switching route, saying firms can offer as many tariffs as they like to target different markets and exclusive deals which will help to re-engage people with switching.

"But of course this means people who don't switch are already paying on average £300 more, and that gap is likely to grow. That means if you don't act, you will pay a fine for apathy. The new database is supposed to address that, but the great worry is that people will be bombarded with what feels like spam from so many companies, the message will be drowned out by shouting.

"I do however welcome the cap on prepayment meter charges. While we've heard spurious claims before that they are no longer more expensive, that's baloney – typically prepayment customers are paying massively more than those on dual fuel in a market that isn't competitive. So it's very important that these people are protected as they tend to include some of the most vulnerable and poorest in society.

"The new cap should at least mean they are not paying extremely over the odds. What I also want to see though is the ability for everyone who is on a prepayment meter, once they qualify for a normal meter, to be able to switch without cost. That is what will truly change the market and unlock people from the prepayment prison."

For more on what MoneySavingExpert.com believes can be done to improve the energy market, read our full submission to the CMA's investigation.

Martin Lewis
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What the report says

The CMA's report sets out a number of proposals, including:

  • A temporary price cap on prepaid tariffs. This would be implemented for a "transitional period" between 2017 and 2020 and means there'd be a maximum rate those who prepay for gas or electricity could be charged. The cap would initially be set after a benchmark analysis, then change over time based on factors such as wholesale costs and inflation.

    The CMA says if this cap had been implemented last year, the average prepaid energy bill would have fallen by 8% – equivalent to around £80 to £90 a year. The proposed cap would be removed in 2020, with the CMA predicting that by then other measures such as smart meters and a natural increase in competition would have narrowed the gap in price between those on prepaid and standard tariffs.

  • Opening up customer databases to rival firms. An Ofgem-controlled central-database would allow energy firms to contact and offer better deals to those who've been stuck on a rival supplier's standard tariff for at least three years. The database would be an 'opt-out' scheme, which means that unless energy users ask not to be included, their details would automatically be uploaded, allowing rival firms to contact them.

  • Removal of the 'four tariff rule'. This rule, which means energy firms can only offer four different tariffs to customers at any given time, was originally implemented in April 2014 to simplify the market. But today's report found the cap "limits competition and innovation", and says removing it would enable suppliers and price comparison websites to offer more competitive tariffs tailored to certain customer groups.

  • A boost for price comparison websites. The ability of price comparison websites to help customers find better deals would be boosted by giving them access to info such as customer meter numbers, and by allowing them to negotiate exclusive deals with suppliers. Price comparison websites would also be required to be transparent about how they cover the market and the information they display.

Prepaid energy tariffs to be capped as competition watchdog sets out plans to shake up market
Prepaid energy tariffs to be capped as competition watchdog sets out plans to shake up market

What happens next?

Today's report represents the provisional findings of the CMA's investigation into the energy market. The final report, which is expected to confirm today's findings, will be published on 25 June.

The CMA will then finalise its plans by December, with all proposals in today's report expected to be in place by 1 April 2017.

'A new and better deal for customers'

Roger Witcomb, chairman of the CMA's energy market investigation, says: "Clearing the way for competing suppliers, and price comparison websites, to alert customers to the savings they can make will shake up the industry. Given the scale of the problems and the potential savings on offer, we think bold measures like giving rival suppliers the chance to contact long-standing standard-variable-tariff customers are justified.

"However, for customers on prepayment meters, a group which contains some of the most vulnerable customers, their options are far more limited. It's more difficult for their suppliers to compete, more difficult for such customers to switch, and they have far fewer tariff choices. Energy is both an essential and expensive item for many of these four million households, whose cheapest tariffs are around £300 more expensive than for other customers."

Energy regulator Ofgem has confirmed it plans to take action off the back of today's report.

Chief executive Dermot Nolan says: "The CMA package of remedies, combined with smart meters and faster switching, should clear the way to secure a new and better deal for consumers.

"We will now work closely with the CMA on how these proposed remedies should be implemented to ensure consumers get the full benefits."

'A wake-up call to the big six'

Energy secretary Amber Rudd says the CMA's report is "a wake-up call to the big six".

She adds: "Energy customers should get a fair deal from a market that works for them. That's why we called for the biggest ever investigation into the energy market and won't hesitate to take forward its recommendations.

"This report goes hand-in-glove with everything this government is doing to deliver a fair, competitive energy market that puts the families and businesses paying the bills first and the power back in their hands."

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