Call to ditch price cap and introduce a social tariff

The government should scrap the energy price cap in its current form and look to introduce stronger protections for the most vulnerable consumers, such as a social tariff, a thinktank has urged.

A new report by the Conservative-leaning Centre for Policy Studies slams what it labels the “devastating effect” both the cap and Ofgem’s Market Stabilisation Charge (MSC) have had on competition in the retail market.

It highlights how volatile wholesale prices resulted in fewer fixed tariffs on the market, seeing the number of consumers on price-capped tariffs almost doubling from roughly 15 million in August 2021 to around 29 million households as of April 2023.

“In other words, a policy that was originally brought in to ‘protect’ disengaged or vulnerable customers now rules almost the entire market. The price cap has now become the de facto market price,” said the report.

It further said this had removed “any incentive to change supplier”, especially once the Energy Price Guarantee superseded the cap last winter.

“Switching rates have predictably fallen off a cliff, from 496,000 per month in 2019 to just 85,000 per month in 2022,” it added.

Other grievances the report raises include the fact the cap is not as transparent as might be assumed, and that Ofgem has had to “constantly tinker with the formula in order to nursemaid suppliers through wholesale volatility”.

By way of example, it points to the recently announced half-yearly results from Centrica which showed British Gas had made an almost 900% increase in operating profits, largely thanks to backward-looking cost recovery allowances that Ofgem introduced.

It said: “While these may be justified (given that, for example, suppliers had to purchase energy at above-cap prices for customers rolling onto SVTs), it led to the bizarre spectacle of Ofgem having to publicly defend the profits of the suppliers it regulates (pleading that they are ‘one-off’).

“Put simply the price cap was conceived of in an era of relatively benign wholesale prices – and is patently no longer fit for purpose in today’s market.”

Elsewhere the report takes aim at the MSC which was introduced in 2022 so that suppliers which have hedged are better able to recover more of their costs if there is a sharp fall in wholesale prices and their customers are poached by other retailers offering cheaper deals. The MSC activates if wholesale prices move more than 10% from the price cap level.

“Put another way, Ofgem is so worried about suppliers failing that it is actively discouraging the introduction of tariffs that would cause significant switching. This of course has a destructive effect on competition, as the regulator itself admits,” the report said, referencing comments made by Ofgem in its decision to extend the policy.

The report concludes by making several recommendations to government.

These include abolishing the price cap in its current form, and ensuring government “no longer dictates the price of energy as it does today”. Ultimately, it believes that competition is the best protection for consumers.

Alongside this, ministers must also introduce stronger protections against fuel poverty, such as a social tariff – a key ask of Utility Week’s Action on Bills Campaign. A social tariff, the report said, would better target state funding to those who need it and go beyond benefit recipients to include lower income, energy inefficient homes.

“As with the original vision for the price cap, there should also be protection for those on prepayment meters, given their vulnerability to exploitation and lower levels of competition in that market,” it added.

Other recommendations include tackling the loyalty penalty such as by making the ban on acquisition-only tariffs permanent and/or a relative price cap.

Commenting on the report, 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.”