Will the Business, Energy and Industrial Strategy (BEIS) committee’s proposed cap on energy prices benefit consumers?
No – Sam Dumitriu is head of research at the Adam Smith Institute
Price caps will reduce competition, stifle innovation, and push up average prices. It is often assumed that price differences are a sign of insufficient competition, but markets with highly engaged customers and high switching rates see bigger gaps between standard variable rates and fixed tariffs.
Supporters of the cap cite the CMA’s claim that bill payers are overcharged by £1.4bn a year, but they neglect to mention that the industry was only making £1.1bn a year in profit when their investigation took place.
The big six will respond to price caps by withdrawing the best deals, slashing the incentive to switch suppliers. Whenever OfGem intervenes against the advice of economists to reduce “unfair” price differences, customer engagement falls, and the best value deals are withdrawn.
The UK’s switching rates, which used to be the highest in Europe, have only just recovered after halving under OfGem’s last regulatory misadventure. Only competition can deliver lower prices for all, don’t let price caps kill it.
Yes – Ruth London is from Fuel Poverty Action
With thousands dying from cold homes every winter, a cap on energy prices is long overdue. The Competition and Markets Authority said switching was the best way to bring prices down. Instead, according to their own figures, we have collectively been overpaying to the tune of £1.4bn a year.
Ofgem, charged with protecting consumers, has now apologised for leaving millions to the mercies of the market. A cap should, as proposed, be absolute, not relative – which would invite manipulation.It should be universal, not means-tested, which could further increase prices for people who do not qualify, but who may still be freezing.
It should be accompanied by major infrastructure investment in well-insulated homes. And clearly, the level of the cap is crucial.
But none of this should delay relief from the sheer misery caused by high prices, while profits soar. Ofgem’s recent, limited, “safe-guarding cap” arbitrarily excludes many fuel poor customers. Yes, we need a cap before next winter.