Energy price cap ‘ineffective’ in an evolving market

Proposals for a cap on UK domestic energy prices by a new Conservative government, should Theresa May find herself back in power on 8 June, have been the most significant intervention of energy matters into the election campaign so far, writes Energy World’s Steve Hodgson. However, the Labour party manifesto has pledged to ‘ensure that 60% of the UK’s energy comes from zero carbon or renewable sources by 2030’ and to invest in ‘in new publicly owned energy provision.’ Labour also promises to cap energy costs and to ban fracking for unconventional gas.

In contrast, the Conservative manifesto is firmly committed to developing UK shale gas and proposes the creation of a new shale gas regulator, with changes to planning laws and a shale gas wealth fund. May’s manifesto also opens the door for developing onshore wind in Scotland.

If enacted by either party, the proposed price cap would be the most significant intervention into energy markets for many years. The proposals follow last year’s report from the Competition and Markets Authority (CMA) on reforming a poorly-performing retail energy market by opening up competition and helping customers get a better deal – largely by switching from standard tariffs to cheaper deals with either their incumbent supplier or a competitor. May is quoted as saying she is: ‘Fed up with rip-off energy prices’ and suggesting that a new price cap would cut £100 off the average annual bill.

But the proposals have been roundly criticised as likely to be ineffective – suppliers could react simply by closing the gap between their lower, fixed price and higher standard tariffs by raising the former. Ryan Thomson, Partner at business and technology consultant Baringa, said: ‘A price cap is not the right way to increase competition in the energy market or create savings for customers. The previous government measured competitiveness in the market by the number of customers switching supplier. But a price cap might actually increase the number of customers who remain with the Big Six [suppliers], as it would reduce the difference in price between suppliers and therefore remove the incentive to switch.’

He continued: ‘To improve competition, political parties should look beyond headline-grabbing initiatives and recognise what more energy suppliers and the regulator can and should be doing. For instance, suppliers could introduce better measures of client satisfaction. These could include use of smart service products to boost energy efficiency and reduce overall customer spend, without switching.’

The recent launch of two new energy supply companies could be seen as evidence of an evolving UK market. Ofgem has granted a licence to People’s Energy, which says its ethically minded policies include giving customers a voice in how the company operates, and returning 75% of its profits to them. Pure Planet, a new renewables-based ‘digital energy brand’ has been launched to take on the Big Six suppliers through the use of apps and an ‘artificial intelligence bot’ for service.