Opinion: an energy price cap would be needless tinkering in a functioning market

Intervention in the energy market would be retrograde and counterproductive, argues Stephen Murray

Energy has become a political football. Both Conservatives and Labour are promising radical reforms in a bid to cut consumers’ bills.

A laudable aim. But the headline proposed solution – a cap on prices – is doomed. Here’s why.

Ofgem, the energy regulator which would assume responsibility for pricing the domestic supply market under the next government, commissioned an extensive report into the energy industry in 2014 from the Competitions and Markets Authority (CMA).

The report, published last year, found that energy companies are NOT making excessive profits (particularly in residential supply) and that price intervention is NOT in the best interests of the market.

What it did find is that the main problem with the energy market is the lack of switching by domestic consumers: 56% of respondents to the survey said they “had never switched supplier, did not know it was possible, or did not know if they had done so”.

CMA concluded that for “most domestic customers on standard variable tariffs (SVT), detriment will be reduced as soon as they engage [in the market] effectively.”

Energy firms are routinely accused of over-charging their customers. We’re repeatedly told the energy market is ‘broken’.

But if we change the syntax from “over-charging” to “over-paying”, and from “broken” to “lacking consumer engagement”, we shift the emphasis onto consumers, and give them the power to confront the Big Six behemoths.

Given the facts – significant price differentials between SVT and fixed-rate deals, 50 competing providers, hassle-free 17-day switching – it’s self-evident that investing time, resource and money on raising consumer awareness of switching would bring huge consumer benefit.

A future government could explore many initiatives without tinkering in the free market:

• implement the CMA’s recommendations, published a year ago, including prompting customers to engage, thus raising switching volumes and boosting competition
• extend awareness campaigns, such as Go Energy Shopping, that achieved uplifts in customer switching
• remove the erroneous perception of “hassle” and “not worth it” that clouds the energy switching market
• support initiatives such as midata and the smart meter rollout to empower customers to understand their own energy usage.

Beware unintended consequences

It bears repeating: the energy switching market isn’t broken, regardless of what politicians say.

We have multiple suppliers, great choice, tariff innovation and significant savings. These are available today for the vast majority of UK households, at amounts two and three times the suggested £100 cap.

Put another way, there are currently over 70 available tariffs that would save the average UK household more than £100.

And there’s the broader issue – does market intervention actually work?

Experience suggests it would lead to a fall in competition, with prices settling at a higher level than in a free market. A price cap would almost certainly mean that cheap deals would disappear, prejudicing who have already engaged in the market by forcing them to pay more.

There are also practical considerations. It has been proposed, for example, that Ofgem should set the cap with reference to wholesale prices. Good luck with that: wholesale prices jumped 50% in six months last year, yet some suppliers increased prices earlier this year, some lowered and some froze them.

How would Ofgem manage this minefield of choosing just ONE approach and number to “peg” prices against? 

Read Utility Week‘s analysis “The Tory price cap: what do we know?”