Exclusive: ‘Price cap not fit for purpose’ as Government slashes support
The energy price cap is “no longer fit for the purpose” and should be reviewed following the Government’s decision to cut back support for households to just six months, according to Cornwall Insight.
New Chancellor Jeremy Hunt announced the Energy Price Guarantee will only run until April, rather than the initially proposed two years, in a bid to calm markets over borrowing and unfunded spending.
Instead, Downing Street will review what is the best way to help vulnerable energy users beyond the spring raising the prospect of new schemes more limited in scope.
Robert Buckley, head of relationship development at the energy specialist told City PM that households currently face being exposed to price cap rates, which he predicts will be well above the £2,500 average established in the support package next spring.
He said: “If we do nothing else, we would revert back to the price cap which is very likely to be above £2500 per year. What you’ve got to balances is this question of affordability and breadth of coverage and clearly what the Government has decided, is a mass scheme is not affordable beyond the current winter.”
In such a context, he argued this provided an opportunity to reform the price cap.
He noted that the price cap has “already stuffed the retail market by triggering the collapse of many suppliers” with nearly 30 energy firms collapsing in the past 15 months – unable to pass on record wholesale costs.
Buckley also highlighted that spot prices are only one factor in the price cap, and that suppliers were also overpaying energy by purchasing gas via season ahead contracts.
This could be reformed by scrapping the price cap.
He explained: “The Government could think spot prices are going to be cheaper, and it could change the rules to get rid of the default tariff cap. You might end up with lower costs. In fact, in the summer, I think it’s quite possible you could certainly lower than the two and a half grand but the energy price guarantee is written.
What they would need to do though is work very carefully with the suppliers, who are buying the energy to make sure the suppliers were buying it in the right way.”
The Government is reportedly weighing up reforms to the price cap and consumer support, including potentially scrapping the mechanism.
Cornwall Insight previously forecast the price cap could rise above £6,000 per year next spring, and had predicted the Energy Price Guarantee could cost between £72-140bn.