The energy price cap is keeping bills artificially high and fuelling inflation, an influential think tank has warned.
The Centre for Policy Studies (CPS) is urging ministers to scrap the cap, arguing that it prevents people from accessing cheaper deals.
The energy price cap was originally introduced in 2017 as a temporary measure to stop energy companies overcharging loyal customers who didn’t shop around for deals. The Government argued it would protect vulnerable customers, such as those on prepayment meters or with a disability.
The cap sets the maximum price energy companies can charge households per unit of energy and is based on the wholesale cost of power. It is reviewed every three months and currently limits the monthly bill for a typical household to £2,074.
However, the CPS said the cap had in practice become a state-mandated price, with limited incentives for providers to offer better deals.
The think tank, which was founded by Margaret Thatcher, said the three month delay in reviewing the cap also meant falls in wholesale energy prices were taking longer to filter through to households than in other countries.
The CPS said this was partly why Britain’s inflation crisis was worse than in other economies. Inflation remained at 7.9pc in June, compared to 5.5pc in the eurozone and 4.1pc in the US.
Dillon Smith of the CPS 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.”
Nearly all tariffs have been priced either at or just below the cap for the past two years, the CPS found, and switching rates have plunged from 496,000 per month in 2019 to just 85,000 per month in 2022.
Competition in the energy market had “essentially frozen”, the CPS said.
Economists have blamed the price cap for prolonging the pain in Britain, as it takes longer for wholesale price changes to filter through.
Regulator Ofgem will announce on August 25 how much average bills will cost from October.
Based on current market prices, consultancy Cornwall Insight has predicted the cap will fall to £1,860.
The Government originally pledged to review whether the cap was still needed annually from 2020 onwards “until 2023 at the latest”. However, the onset of the pandemic and the surge in energy prices following the invasion of Ukraine has prolonged the policy.
The CPS said the Government should scrap the price cap and instead introduce stronger protections against fuel poverty, such as a social tariff for those spending a considerable share of their household income on energy bills.
The think tank is closely associated with the Conservative Government, with director Robert Colvile one of the authors of the party’s 2019 manifesto.
Dr Craig Lowrey, principal consultant at energy consultancy Cornwall Insight, said: “Despite recent reductions in the Default Tariff Cap, households are still facing bills that are well above historic levels.
“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.”
A spokesperson for the Department for Energy Security and Net Zero said: “The Government will always ensure that the energy market is working for consumers to protect them from sky-high bills and that households are getting the best deal.
“We welcome this report as part of our ongoing consultation on putting in place regulations to ensure people can access the full benefits of moving to a smarter, more flexible energy system.”
Oh wow, a right wing think tank started by Margaret Thatcher opposes state intervention to protect consumers from price gouging, shocking stuff.
The Centre for Policy Studies is a lobbyist group. It produces psuedo research that always finds rich people need to get richer.
>“Utility firms are being actively discouraged from offering new, more affordable deals to customers because of state interventions in the energy market.
“It would be cheaper if they could charge more.”
The reason the UK pays so much for its gas is it has to bid on the global liquid gas markets for gas from Qatar to top up what we get from North Sea and Norway. We also have no winter storage so we have to buy at mid winter prices rather than stock up in summer then release that priced gas during winter.
Oh no a cap that stops us from gouging the hell out of you has some how stopped us offering a lower price.
What dumb logic is that.
I do agree with them that the 3 month lag in setting the gap to reflect changes in wholesale prices is unhelpful. It should be set monthly; or at set monthly if prices fall.
But otherwise, nah. Energy companies are wanting to return and make up for their losses and if the cap were removed they’d put prices up, not down.
But that’s hardly surprising coming from an economically right wing think tank set up by Thatcher.
Oh and guess what, 57 Tufton Street.
‘We will charge you less when you get rid of the only thing stopping us from charging more again. Honest’
Interesting that we accept some things to be artificially high and some don’t.
Like BoE interest rates high? Fine. Because fuck businesses and home owners (and anyone else who took loans).
Energy bills high? Oh no, we can’t have that!
Either way, the rich benefit from this, so why such a divide?
>However, the CPS said the cap had in practice become a state-mandated price, with limited incentives for providers to offer better deals.
How removal of the cap is gong to incentivise better deals? It seems like it will only enable companies to hike the prices.
There is no free energy market, so you can’t think that “this one simple trick” will magically bring competition and energy companies will happy clappy join the race to the bottom.
If government wants lower the bills, they should lower the price cap and ideally the market should be nationalised. Capitalism in such captive environment is never going to work.
Read most of the article, I assume the solution is remove the price cap but that seems like an odd way to encourage lower prices.
9 comments
The energy price cap is keeping bills artificially high and fuelling inflation, an influential think tank has warned.
The Centre for Policy Studies (CPS) is urging ministers to scrap the cap, arguing that it prevents people from accessing cheaper deals.
The energy price cap was originally introduced in 2017 as a temporary measure to stop energy companies overcharging loyal customers who didn’t shop around for deals. The Government argued it would protect vulnerable customers, such as those on prepayment meters or with a disability.
The cap sets the maximum price energy companies can charge households per unit of energy and is based on the wholesale cost of power. It is reviewed every three months and currently limits the monthly bill for a typical household to £2,074.
However, the CPS said the cap had in practice become a state-mandated price, with limited incentives for providers to offer better deals.
The think tank, which was founded by Margaret Thatcher, said the three month delay in reviewing the cap also meant falls in wholesale energy prices were taking longer to filter through to households than in other countries.
The CPS said this was partly why Britain’s inflation crisis was worse than in other economies. Inflation remained at 7.9pc in June, compared to 5.5pc in the eurozone and 4.1pc in the US.
Dillon Smith of the CPS 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.”
Nearly all tariffs have been priced either at or just below the cap for the past two years, the CPS found, and switching rates have plunged from 496,000 per month in 2019 to just 85,000 per month in 2022.
Competition in the energy market had “essentially frozen”, the CPS said.
Economists have blamed the price cap for prolonging the pain in Britain, as it takes longer for wholesale price changes to filter through.
Regulator Ofgem will announce on August 25 how much average bills will cost from October.
Based on current market prices, consultancy Cornwall Insight has predicted the cap will fall to £1,860.
The Government originally pledged to review whether the cap was still needed annually from 2020 onwards “until 2023 at the latest”. However, the onset of the pandemic and the surge in energy prices following the invasion of Ukraine has prolonged the policy.
The CPS said the Government should scrap the price cap and instead introduce stronger protections against fuel poverty, such as a social tariff for those spending a considerable share of their household income on energy bills.
The think tank is closely associated with the Conservative Government, with director Robert Colvile one of the authors of the party’s 2019 manifesto.
Dr Craig Lowrey, principal consultant at energy consultancy Cornwall Insight, said: “Despite recent reductions in the Default Tariff Cap, households are still facing bills that are well above historic levels.
“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.”
A spokesperson for the Department for Energy Security and Net Zero said: “The Government will always ensure that the energy market is working for consumers to protect them from sky-high bills and that households are getting the best deal.
“We welcome this report as part of our ongoing consultation on putting in place regulations to ensure people can access the full benefits of moving to a smarter, more flexible energy system.”
Oh wow, a right wing think tank started by Margaret Thatcher opposes state intervention to protect consumers from price gouging, shocking stuff.
The Centre for Policy Studies is a lobbyist group. It produces psuedo research that always finds rich people need to get richer.
>“Utility firms are being actively discouraged from offering new, more affordable deals to customers because of state interventions in the energy market.
“It would be cheaper if they could charge more.”
The reason the UK pays so much for its gas is it has to bid on the global liquid gas markets for gas from Qatar to top up what we get from North Sea and Norway. We also have no winter storage so we have to buy at mid winter prices rather than stock up in summer then release that priced gas during winter.
Oh no a cap that stops us from gouging the hell out of you has some how stopped us offering a lower price.
What dumb logic is that.
I do agree with them that the 3 month lag in setting the gap to reflect changes in wholesale prices is unhelpful. It should be set monthly; or at set monthly if prices fall.
But otherwise, nah. Energy companies are wanting to return and make up for their losses and if the cap were removed they’d put prices up, not down.
But that’s hardly surprising coming from an economically right wing think tank set up by Thatcher.
Oh and guess what, 57 Tufton Street.
‘We will charge you less when you get rid of the only thing stopping us from charging more again. Honest’
Interesting that we accept some things to be artificially high and some don’t.
Like BoE interest rates high? Fine. Because fuck businesses and home owners (and anyone else who took loans).
Energy bills high? Oh no, we can’t have that!
Either way, the rich benefit from this, so why such a divide?
>However, the CPS said the cap had in practice become a state-mandated price, with limited incentives for providers to offer better deals.
How removal of the cap is gong to incentivise better deals? It seems like it will only enable companies to hike the prices.
There is no free energy market, so you can’t think that “this one simple trick” will magically bring competition and energy companies will happy clappy join the race to the bottom.
If government wants lower the bills, they should lower the price cap and ideally the market should be nationalised. Capitalism in such captive environment is never going to work.
Read most of the article, I assume the solution is remove the price cap but that seems like an odd way to encourage lower prices.