The introduction of the energy price cap has “destroyed” the supply market and its removal is an essential precondition of any reform of the system, the UK’s first electricity regulator has told the government.
Professor Stephen Littlechild, who was the first head of the Office of Electricity Regulation from 1989 to 1998, has outlined a withering critique of the flagship energy policy in his response to the Department for Business, Energy and Industrial Strategy’s call for evidence on the future of the retail market.
The response, seen by Utility Week, said the price cap has had “very serious adverse effects on competition and hence on customers.
“It has destroyed the market. Consequently, a precondition of any policy to recreate any kind of future energy market must be the removal of the energy price cap.”
Littlechild wrote that the cap has been “nothing short of a disaster” in the context of recent rises in wholesale prices.
“It has imposed additional restrictions, risks and costs on suppliers, thereby causing or materially contributing to the failure of nearly fifty suppliers.
“There is now a regulated variable tariff price at which suppliers don’t want to sell, and a few unregulated fixed tariff prices at which customers don’t want to buy. The price cap has prevented competition from working, removed effective customer choice and replaced it by heavy-handed and inflexible regulatory dictat.
“Removing of the price cap could enable a return to a vibrant competitive market. Retaining it would freeze market shares and preclude competition and new entry.”
Littlechild urged the government and Ofgem to take steps to remove the cap “at the latest” by December 2023, which is the cut-off date set out in legislation for its phase out.
He rejected the argument that the pre-price cap market was “cosy”.
“The only impediment to effective competition is the price cap itself. Removing the price cap is precisely the measure needed to achieve effective competition,” the paper said.
And axing the price cap would not “preclude” other actions to protect vulnerable customers, such as increasing the Warm Homes Discount.
Littlechild also criticised proposals in last year’s energy white paper to tackle the so called “loyalty penalty” by conducting trials of opt-out automatic switching.
He wrote that many “supposedly irrationally loyal customers were in fact prudently sticking with suppliers they knew” and do not seem to have felt strongly about the lower “taster” tariffs on offer by some suppliers.
“To prohibit or discourage widely differential prices would favour some suppliers at the expense of others, and limit competition to the detriment of customers generally, for a policy that is not obviously commercially viable and that is not obviously valued by most customers themselves.”