Wonks warn against price cap freeze
The Government should focus on more targeted support for households, rather than intervening in the market by freezing the price cap, argued two of the UKs leading think tanks.
Andy Mayer, energy analyst at the Institute of Economic Affairs, called on Downing Street to ramp up targeted welfare measures for vulnerable energy users such as the Warm Home Discount, and to consider a social tariff rather than looking to contain market forces through costly interventions.
He told City A.M.: “Freezing prices today means freezing people tomorrow. No Government can buck global energy prices for long. Pretending otherwise encourages waste and puts the cost on future generations.”
The energy sector is currently rallying around Scottish Power’s proposal for a deficit fund – where sppliers would freeze the cap for two years and take out state-backed loans from banks.
This would be paid back by consumers over 10-15 years.
Octopus Energy has lent its support for the scheme, and City PM understands EON UK and Ovo Energy are also both in favour of a deficit fund.
Scottish Power boss Keith Anderson has previously held talks with Business Secretary Kwasi Kwarteng, and believes the Government is seriously considering the idea.
The Government is under increasing pressure to ramp up support with expectations the price could climb above £6,000 per year next spring.
Ofgem is announcing the latest update for the price cap tomorrow, which is expected to drive bills to £3,500 per year from October.
The current price cap – set at £1,971 per year – is already a record.
However, Mayer believed that the market provides key pricing signals for consumers to reduce energy usage and that the intervention could exacerbate supply shortages and warp the market – driving up prices in the long-term.
He said: “A focus instead on relief from high prices through targeted welfare and general tax cuts does not distort investment signals, ensuring, alongside supply-side reform, future resilience.”
With 85 per cent of households dependent on gas for central heating, he warned that “headline chasing proposals” to cap energy bills could “endanger lives.”
Alongside industry proposals, he criticised the Labour Party’s calls to fund a price cap freeze partly through ditching investment relief from the Energy Profits Levy on North Sea oil and gas operators – as this would “undermine” financial backing for domestic projects.
Meanwhile, John Macdonald, director of strategy at the Adam Smith Institute, has also urged the Government not to bring in a price cap freeze.
In his view, such a move would benefit wealthier households at the expense of more support for vulnerable energy users.
He explained: “Freezing the price cap is far from the best way to support those most in need this winter. Given that wealthier households use more energy on average, this policy is poorly targeted. It would be better to support less well off households with uprated benefits or direct cash transfers.”
Rather than imposing more controls, the Government should be in favour of genuine competition in the market to drive down prices.
He also believed the time had come to ditch the energy price cap following market carnage across the energy sector, which has seen nearly 30 suppliers collapse in the past 12 months – directly affecting over four million customers.
Macdonald said: “In the longer term, the Government needs to look at restoring competition to the energy market to help push down prices. Instead of constantly tweaking an ill-suited price cap, the Government would do well to consider a new solution that keeps prices fair and stable over time for when the price cap mechanism is up for renewal next year.”