The government has been warned that caps on energy prices could prompt steep hikes in bills in the run up to their introduction.
The Institute of Economic Affairs (IEA) has said that price controls, which are being mulled over by ministers to help customers on poor value for money standard variable tariffs, would reduce competition among energy firms and lead to spikes in bills.
The free market thinktank has issued this warning as it published a new report urging the government to harness the opportunity provided by Brexit to simplify energy policy and reduce household fuel bills.
Once the UK has left the EU, the IEA says this country will no longer be subject to the range of subsidies, quotas and targets set by the European Commission.
The EU mandated five per cent reduced rate VAT on fuel bills and winter pensioner payments, which it says benefit rich and poor alike, should both be scrapped, according to the new report.
Instead the IEA urges the government to target energy subsidies at low income households by offering them new electricity vouchers to offset monthly bills.
The IEA also calls on the government to phase out its existing plethora of subsidy schemes for low carbon generation, including the climate change levy, energy company obligations, and renewables subsidies.
It recommends that decarbonisation of the energy system should be instead be delivered via a cap-and-trade-scheme or carbon tax, which would apply to all CO2 emissions on a technology-blind basis.
The government should set a decarbonisation target that would energy markets should be allowed to adjust to in the most efficient way.
The IEA calculates that the proportion of household energy costs accounted for by social and environmental policies has nearly quadrupled over the last five years from four per cent to 15 per cent of a typical bill.
This increase has contributed to what the IEA estimates is a 50 per cent increase in real term cost of electricity for households over the last 16 years.
This it says stands in stark contrast to the steep falls in fuel bills which followed the privatisation of the UK’s energy market in the 1990s.
Diego Zuluaga, financial services research fellow at the IEA, said: “The government can replace these policies with domestically generated and more economically efficient alternatives such as a system of pollution permits which cuts emissions in the most affordable way.”
Earlier this month the Committee on Climate Change hit back at claims that low-carbon subsidies have led to higher bills, saying the additional costs have been more than offset savings from energy efficiency measures.