Forget about the price cap, we need to talk about a coherent energy strategy

Managing director of business electricity comparison site Love Energy Savings Phil Foster has put together his expert comments on the recent energy price cap proposal.

“Strong and stable” has been Theresa May’s soundbite of choice throughout the run-up to the general election, but the proposed price cap is symptomatic of how the UK’s energy policy is anything but. While focusing on a price cap appears to be an effective vote-winning tactic, it serves to draw crucial attention away from the real issue, which is the lack of a robust and coherent energy policy going forward.

Looking at the long-term future of the UK energy sector, the proposed price cap feels counter-productive for two reasons.

Firstly, while a price cap would potentially benefit those households that have been rolled over onto a more expensive tariff, it also means that to make up the shortfall, suppliers are likely to increase the prices of their cheaper deals. As a result, those households which take the time to shop around for a better deal by switching supplier may well be penalised.

Secondly, it provides something of a false sense of security for consumers, who assume that, as they are protected by a ‘price cap’, they do not need to worry about finding a cheaper deal elsewhere. In truth, if you are benefitting from the price cap then you are already paying too much for your gas and electricity, and would be better served by switching supplier than you would relying on the price cap to lower your bills.

Rather than pandering to voters with a policy that sounds good on paper but offers little real substance, instead the government urgently needs to address issues that persist concerning our ongoing security of supply. Last winter, spare capacity margin, the buffer between peak demand and available capacity, fell to around 1.2 per cent, the lowest level for a decade. This coming winter it could well fall even further, with a variety of factors meaning that disruption to supply, or significantly increased costs, are a very real possibility.

April of this year saw the first day without coal contributing to our energy mix since the Industrial Revolution. While this in many ways is to be applauded, clearly demonstrating a move away from the most polluting generation option currently used, the impact on our overall energy mix is less rosy. We now rely on gas-fired generation for 47 per cent of our energy on average, a figure that climbs significantly higher during periods of peak demand or when other generation technologies struggle. When weather conditions mean that renewable technologies underperform, for example, the burden on gas to pick up the slack increases. Often, peak electricity demand coincides with periods of cold weather, where gas is also required for heating, further exacerbating this issue.

This winter, our reliance on gas will be particularly tested. A lack of investment in the North Sea after the crash in oil prices in 2014 means we are not self-sufficient in terms of our gas supplies, and instead are reliant on imported supplies from Norway, France and the Netherlands. This leaves us vulnerable to price rises, as well as meaning that supply issues in those countries and elsewhere in Europe result in higher prices for us. Last winter, outages at EDF’s nuclear power plants across France resulted in substantially higher prices for both electricity and gas here in the UK.

With a clear withdrawal of support for new renewable energy generation schemes and a nuclear solution in the form of Hinkley Point C still ten years away, quite how the Government intends to provide us with energy security in the meantime without adding significantly to the bills we pay both as businesses and consumers is unclear. The proposed price cap is at best a short-term vote winner and, in reality, risks pushing prices higher in the longer term as the best deals become more expensive to make up for lower standard tariffs. By taking the time to understand their energy usage and actively seek out a better deal, consumers would see far more benefit in terms of real savings than any price cap would offer.

It is right that the energy sector is viewed as a key battleground for the election, but it should be focused around laying out an effective, well-costed and sustainable long term energy strategy, not simply using it as a tool to try to grab votes.