Why Theresa May’s energy price cap is a double-edged sword
The Domestic Gas and Electricity (Tariff Cap) Bill was passed recently and will require the energy regulator Ofgem to cap standard variable and default energy tariffs. The initiative has been debated for some time, but finally gained some traction after the Competition and Markets Authority found that consumers have been overpaying by a total of £1.4bn a year. Prime Minister Theresa May has declared this as a big victory against the big six energy companies, but will a move towards fairness in the market transcend into cheaper energy prices for consumers?
What does the cap mean for suppliers?
The setting of an absolute cap on energy represents a significant leap towards re-regulation of the energy market, and as is often the case, further regulation will test private sector competition, innovation and confidence. In turn, there is not a lot to incentivize energy firms to avoid leaning their prices towards the top of the cap, meaning they are likely to see the initiative as a ‘target’, rather than a cap.
It could mean that the low-price deals are withdrawn from the market (as firms can no longer cross-subsidise them). Suppliers may also have less of an incentive to innovate, and consumers will have less incentive to look for better deals, with smaller competitive suppliers possibly leaving the market completely. The ripple effect of this is that new firms (who have in recent years offered the best deals) may be put off entering the market, further monopolising the energy landscape.
Competition or fairness?
An open and liberalised energy market somewhat forces energy companies to compete, and when consumers chose better deals, firms are encouraged to lower their prices and offer better services. The issue lies however in people finding the time to switch, as if people don’t, suppliers will feel less obliged to innovate and compete with others. Whilst the energy price cap will ensure the majority of consumers are paying the same prices, the opportunity for other firms to enter the market and undercut others will be less so, meaning those that actively search for ‘better deals’ are going to have to look that little bit harder.
The Government is placing fairness ahead of lower average prices, but such a move is likely to sacrifice the benefits of a dynamic energy market, and much like fuel costs, higher average prices will be felt more by low income households who already spend a much higher proportion of their incomes on energy. What is being perceived by the Prime Minister as a positive contribution towards the JAM (just about managing) demographic, might actually do more harm than good to those on low to middle incomes.
The cap will be in place from the end of 2018 until 2020 when Ofgem will recommend if the cap should remain on an annual basis up to 2023. Ofgem will review the level of the cap at least every 6 months while it is in place.
BECG have a strong track record of delivering expert counsel for heavily regulated sectors. If you would like more information on the energy price cap, and what it means for your business, please contact BECG at firstname.lastname@example.org or 0161 359 4107.
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