The price cap on electricity, a political stunt that will backfire

Energy price cap Theresa May

Theresa May promised there would be a price cap on electricity tariffs. This state interventionism is to fix a broken market and is popular because everyone hates paying high energy bills, but will it have the desired effect?

The bill is simple, the short title states that the new law will make provision for the imposition of a cap on rates charged to domestic customers for the supply of gas and electricity; and for connected purposes and is on track to become law by winter and has a one year lifespan.

As a consumer this sounds great, but we have been here before, does anyone remember Cameron’s intervention in the markets in 2012 with his four bands?

That was quietly dropped as it failed to fix the problem in the market which simply put is that there are winners and losers. For some customers to get a great deal, the energy companies charge their long standing customers with higher rates knowing that the majority will not switch. If there is one rate, as May is setting in law, then in theory all customers who do not switch will be on a better price, sounds good but it depends on the cap rate meeting all market requirements.

The new rate is to be set by Ofgem which will be an incredibly difficult task, even if it is envisioned in the bill only for 2019. Ofgem will need to take into consideration all the underlying costs faced by the retailers and set the tariff to meet a wide set of requirements, from statuary obligations on the larger companies, through to allowing the market to remain competitive for those who do wish to switch. It is almost certain that the price cap will hit some players in the market hard.

The response may be that the whole market will see a price rise. The electricity retailers to stay in the game need to make profits, competition in the market which is competitive means margins are small, a point lost on many; the price of fuel is rising at present but is also unpredictable in no small part due to Iran, therefore the risk of loss is high.

Companies under Cameron raised prices in advance of the cap because they had to hedge against fluctuations in fuel prices; all of them will do the same this time round.

The cap rate will be set by Ofgem, however to make sure it goes through quickly there is no review process through the Competition Markets Authority (CMA).

In effect, if the cap is seen as unfair and is challenged, which is a racing certainty, the only right of appeal will be through judicial review. This means a judge with no specialist knowledge and no resource will be asked to have an opinion on the price the cap which seems particularly ill thought out and shows that this is a vote winner rather than a considered policy.

The cap originated with Ed Miliband in 2013 and was widely lambasted particularly by the Daily Mail as a policy that was state interventionism that would drag us back to the heavy-handed regulation of the energy market, reminiscent of the 1970s. This coverage is in contrast with the Mail’s coverage of the same policy from May, which was lauded as a “crackdown on energy rip-offs”.

The market does leave many on higher tariffs which need to be addressed, but this will be a short lived policy that through uncertainty will in all probability raise prices before quietly being shelved next year. If the market is so badly broken that this intervention is need, a root and branch reform programme should be undertaken but that could take a considerable length of time which this government really does not have.

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