A group of senior MPs have advised the government to act urgently in setting a price cap on energy tariffs to fix the “broken” market, despite warnings from industry experts that a cap could do more harm than good.
Following months of scrutiny of the government’s draft legislation, the Business, Energy and Industrial Strategy (Beis) committee will today recommend the introduction of an absolute price cap on poor value default tariffs.
Labour’s Rachel Reeves, the chair of the committee, said the Big Six energy companies had overcharged customers on default tariffs for years, and recent “feeble efforts” to help customers switch to cheaper tariffs only highlighted the need for government intervention.
“An energy price cap is now necessary and the government must act urgently to ensure it is in place to protect customers next winter,” Reeves said.
The Beis committee found competition in the domestic energy market was not working for 12m customers and said the market had become two-tiered, with some consumers paying up to £300 more than others each year.
However, consumer groups and industry experts voiced concerns that the “well intentioned” cap could have unintended consequences.
“A widespread price cap could lull energy customers into a false sense of security if they think they are protected by it,” said Richard Neudegg, head of regulation at uSwitch.
Energy UK, the industry’s trade body, added that it was vital the cap does not halt the growth of competition in the sector, a point which the Competition and Markets Authority (CMA) flagged after its extensive review of the sector in 2016.
The CMA set out a wide range of remedies for the sector, but it did not back a price cap, warning it could “undermine” the competitive process, resulting in worse outcomes for customers in the long run.
David Gilchrist, head of gas and electricity and partner at law firm DWF, said a cap could wipe out smaller suppliers and reduce competition in the market. He said a price cap set at the wrong level could cause smaller suppliers to go bust when wholesale prices spike.
FTSE 100 utility SSE, which has the largest percentage of customers on default tariffs of any supplier, said new cap-setting methodology is needed to avoid the mistakes of Ofgem’s existing price cap on prepayment meters, though it added that it believes competition would help the market more than a cap.
Former cabinet office minister John Penrose, who has championed the energy price cap, criticised the MPs for their choice of a hard-line absolute cap to be set by Ofgem, which the Tory MP said would reduce customer choice and competition.
He argued for a less interventional relative price cap, under which a cap is set on the difference between the highest and lowest price charged by each supplier.
The government hopes to have a price cap in place by next winter, but it is on a tight deadline with legislation needed before parliament’s summer recess.