The Case Against the Energy Price Cap

• 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
• 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 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

CPS - Tuesday, 8th August, 2023