Where now for an energy price cap?

In the wake of a hung parliament, James Harvey looks at what this means for the energy price cap.

The results of yesterday’s general election start another period of uncertainty for the utility sector and energy policy.

This is especially the case in relation to the energy price cap. Both Labour and the Conservatives had proposed an energy price cap. Labour pledged to keep average dual fuel bills below £1,000 in the transition to renationalisation and the Conservatives pledged to introduce a safeguard cap to protect consumers that do not switch.

Where now for an energy price cap?

There is an obvious tension in the Conservatives’ position that Labour could now make mischief with to encourage consideration of its version of the cap. It is this: would consumers really believe that it is worthwhile engaging in the energy market, while at the same time being told that a price cap is needed to protect them? It does seem like a hard message to get right and the scope for regulatory error is high.

Perhaps a more optimistic point of view is that any debate could help encourage a more detailed assessment of whether any price cap is a good idea and, if it is, the appropriate scope and design of it. This seems particularly important given that the Competition and Markets Authority only recently ruled out using such a price cap.

For example, our model of the UK energy retail market suggests that the £100 savings touted by both parties are unlikely to materialise in practice. This is because these figures do not take account of how consumers and suppliers are likely to react to it.

  • We estimate that around 60 per cent of the savings could be eroded as suppliers seek to recover their costs in other ways – for example by economising on service quality and increasing prices to other customers.
  • The savings could further be eroded if the pressure on suppliers to keep prices low and service quality high falls. This could arise if consumers rely on the government or Ofgem to protect them, instead of voting with their feet. Our analysis suggests that just over a 10 per cent reduction in shopping around could eliminate the any benefits of a price cap through this loss of consumer pressure.

Whatever happens next, it is clear that the fate of the next government (whatever it looks like) will – at least to some extent – rest on its ability to get energy retail policy right.

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