UK urged to abolish energy price cap in bid to boost competition and lower bills
The energy price cap should be abolished, as it is raising bills for customers and stifling competition in the market, according to a new report from the Centre for Policy Studies.
It warns that the energy crisis and the regulator’s scramble to shore up the industry after the collapse of 30 suppliers, has caused the price cap to shift away from its original purpose, and is now a de-facto regulated market price.
The price cap was brought in as an emergency limit to prevent households that don’t switch regularly from being punished with ultra-high bills from suppliers.
However, rather than remaining a protective measure for customers who were unable to take advantage of more choice in the market, normally due to infirmity, disability, or being on a prepayment meter, the cap now covers 29m households – almost the entire market.
Research from CPS, covered in its report ‘The Case Against the Price Cap’, reveals that for almost two years almost all tariffs have been priced at or just below the price-capped level, with no evidence this will change in the near future.
It has meant the government has been effectively setting the market price for energy, removing any possibility for customers hoping to switch to a better deal.
Fix the energy market without a price cap
The group has now outlined a five point plan for reforming the energy market, which would require government legislation.
This includes reviving competition in the energy retail market by ditching the price cap in its current form, while also bringing in a social tariff for vulnerable households.
It favours tackling the loyalty penalty for customers through the banning of acquisition-only tariffs, which have been suspended by Ofgem during the energy crisis, rather than with a price cap.
These proposals come alongside requirements to ensure long-term resilience, with higher prices still a factor for years to come, and encouragement for innovation in line with net zero ambitions.
Forecasters Cornwall Insight expects energy bills will stay historically elevated until at least the fourth quarter of 2024 and that the price cap – currently set at £2,074 per year by regulator Ofgem – will only fall marginally over the 12-15 months.
While this is well below the monster £4,279 per year price cap during the first quarter of 2023, it is still significantly above the £1,000-£1,200 per year norms before the domestic energy crisis and Russia’s invasion of Ukraine.
Ofgem has sought to ensure innovation is sustained in the energy market, settling on partial ringfencing of customer credit balances to keep finances free for challenger firms, while also hoping to ensure its stability with new stringent capital adequacy rules for companies.
During the energy crisis, which included Bulb Energy’s year-long stint as a bailed out supplier, the costs involved in the collapse of suppliers unable to pass on high wholesale costs to wealthier customers added nearly £100 to people’s bills.
A spokesperson for the department for energy security and net zero said: “The government will always ensure that the energy market is working for consumers to protect them from sky high bills and that households are getting the best deal.
“We welcome this report as part of our ongoing consultation on putting in place regulations to ensure people can access the full benefits of moving to a smarter, more flexible energy system.”
Ofgem declined to comment, when approach for comment by City PM