This publication has reported concerns about the potential for a permanent energy price cap. There should be no concerns.
A permanent price cap will only continue to stimulate competition and reduce the need for regulatory ‘meddling’.
The energy price cap reminds me of the minimum wage.
As an economist I, like others, was concerned before the introduction of the minimum wage that it would damage the labour market. I thought it would increase unemployment, especially for the most vulnerable (part-time and low income workers); damage competition for labour and among companies; and cause clustering around low pay as differentials were reduced.
Instead, once it was introduced, we saw that there were virtually no negative effects – but it did combat exploitatively low wages, helped put low income families on a sounder footing – and maybe even stimulated employment because working became more worthwhile.
So, it seems, with the energy price cap, switching rates are at record high levels, driven by increased consumer confidence in engagement (‘what’s the worst that can happen if I switch?’) and by the fact that energy prices are in the headlines with every quarterly announcement about the cap.
Concerns over price clustering have been unfounded, with continued vigorous competition in the switching market. It seems that the main impacts have been to help disengaged (often vulnerable and low-income) households, and to act as a driver of cost reduction among all suppliers.
Indeed, in a market characterised by shrouded pricing, the price cap acts as a proxy for price competition among ‘loyal’ customers – and as such does exactly what we’d all want in a competitive market: brings a pressure for efficiency.
So, just as the minimum wage went from a controversial market interference to a bedrock of a competitive market in labour, so the price cap should become a permanent feature of energy.
This one simple intervention can act to maintain competitive pressure on energy suppliers, whilst providing enough headroom for masses of competition and innovation.
With this one universal protection, we can start to reduce many of the other much more intrusive ‘interferences’ which so often have perverse consequences and create confusion about whether companies are serving customers or the regulator.
You can read Utility Week’s analysis on the future of the price cap here