Energy price cap costing consumers money and driving inflation, says new report

• Although introduced with the best intentions, the Energy Price Cap (EPC) has gone far beyond its intended purpose and is actively harming competition
• The EPC was originally brought in as a time-limited intervention to protect a specific group of customers from price-gouging
• The recent energy crisis has meant it now functions not as a price cap, but as the de facto price for almost every consumer, covering 29 million households 
• Ofgem has also introduced policies which actively disincentive firms from trying to attract new customers
• The result is that competition in the energy market has been essentially frozen, creating significantly higher prices for consumers and driving inflation
• In recent weeks, some have suggested that energy supplies have had their profits boosted by the cap, with a lack of competition keeping prices high
• The Government must chart a strategy for a return to competitive energy markets, which should include removing the EPC in its current form while strengthening protections for those who genuinely need support

 

The energy price cap is preventing customers from accessing lower energy tariffs, contributing to inflation, and should be abolished, according to a new report from the Centre for Policy Studies. ‘The Case Against the Energy Price Cap’, by CPS Energy and Environment Researcher Dillon Smith, examines the history of the Energy Price Cap (EPC) and the crises and political and regulatory distortions which have dragged it away from its original purpose. Far from its original goal of providing protection for customers who were unable to take advantage of market forces and switch between providers, either due to infirmity, disability, or less choice due to being on a prepayment meter, the EPC now covers a staggering 29 million households – almost the entire market – and has moved from a cap to a de facto regulated market price. The research shows that for almost two years almost all tariffs have been priced at or just below the price-capped level, with no evidence this will change in the near future – meaning the government is effectively setting the market price for energy, eliminating any chance of customers switching to a better deal.  The report urges the government to move from a wartime to a peacetime regulatory regime and sets out five key principles of a new system:

1. Return to a retail market with competition at its heart – this means abolishing the price cap in its current form and ensuring the government no longer sets the price of energy
2. Introduce stronger protections as a bulwark against fuel poverty, for example a social tariff for households spending an excessive proportion of their income on energy bills 
3. Tackling the loyalty penalty for those on default tariffs through more nimble regulation, e.g. by permanently banning acquisition-only tariffs
4. Building a resilient energy market for the long-term, acknowledging that we may be entering a period of higher and more volatile energy prices
5. Any future system must encourage innovation and support net zero ambitions

Dillon Smith, CPS Energy and Environment Researcher and report author, said:

‘Contrary to its original intent, the energy crisis has transformed the Energy Price Cap from a genuine cap to a state price control for virtually the entire market.

‘Utility firms are being actively discouraged from offering new, more affordable deals to customers because of state interventions in the energy market. Competition has all but disappeared, meaning prices are being kept high, further contributing to measured inflation. Government needs to rethink the price cap, and deliver choice and competition for consumers.

‘This should come alongside moves to introduce stronger protections against fuel poverty such as a social tariff.’

Dr Craig Lowrey, Principal Consultant at Cornwall Insight, said:

‘Despite recent reductions in the Default Tariff Cap (price cap), households are still facing bills that are well above historic levels. This has raised questions about the cap’s purpose, its efficacy in safeguarding consumers, and its impact on tariff competition.

‘In light of this, it becomes crucial to explore alternative measures that can better protect consumers, promote fair competition, and ensure affordable and transparent energy pricing for all. The exploration of options such as social tariffs, energy efficiency initiatives, and various other avenues should be prioritised.
‘Any reductions to the price cap should not diminish the sense of urgency in implementing necessary changes. The protection of vulnerable households from high energy bills remains a pressing issue that requires immediate attention.’

ENDS

NOTES TO EDITORS

• ‘The Case Against the Energy Price Cap’ is available to download here.
• Dillon Smith is the Energy and Environment Researcher at the Centre for Policy Studies.
• For further information, please contact Emma Revell on 07931 698246 and [email protected] or Josh Coupland on 07912 485655 and [email protected]. 
• The Centre for Policy Studies is one of the oldest and most influential think tanks in Westminster. With a focus on taxation, economic growth, business, welfare, education, housing and green growth, its goal is to develop policies that widen enterprise, ownership and opportunity.

 

Date Added: Tuesday 8th August 2023