Editor’s letter: Ofgem’s price cap quandary

Ofgem finds itself under political pressure to intervene in the energy market and implement stricter and wider ranging price caps.

The popular and political appetite for a price cap seems insatiable.

Ofgem’s proposal for a safeguard tariff, which would extend the prepayment meter intervention mandated by the CMA, offers a good compromise between acknowledging energy market failings and creating massive unintended consequences via heavy-handed intervention.

But it appears the mood for populist power slogans has no room for such rationality. Following publication of the regulator’s intentions to consult with consumer groups and industry on the detail of a safeguard tariff, a flurry of furious comments splurged into national headlines. MPs from both sides of the House slammed the plan as a “betrayal” of the Conservative manifesto pledge, demanding that Greg Clark take the job of market intervention away from Ofgem and legislate for a more assertive price cap instead.

The energy secretary has insisted he is ready to do this, though he is no doubt chary given the daunting task of achieving a majority consensus in the Commons – even on this issue of relative political common ground.

In the meantime, he has stated that he wants “rapid progress” from Ofgem and has agreed with Labour critics who proclaimed that Ofgem could go “much further” to hamstring the perceived cartel of the big six.

He is likely to be disappointed on both counts.

At time of writing, Ofgem had set no timescale for its price cap consultation process. At a minimum, however, it will take several months to agree a formula for price regulation with the market, and if Ofgem cannot agree an acceptable approach with suppliers it will take considerably longer – perhaps a year or more.

This leads to the second reason why calls for a beefier market intervention are unlikely to be met via Ofgem. As former regulator Stephen Littlechild has warned, the regulator lacks the statutory powers to impose a price cap that does not have supplier backing.

By going “much further” Ofgem would risk an appeal to the CMA, which considered and rejected a broad market price cap during its two-year investigation into the market.

If the government is convinced that an absolute energy price cap for 17 million UK households is both expedient and desirable, it should take responsibility for delivering it – and sooner rather than later. The industry is not going to tie a noose around its own neck.