Prime Minister Theresa May wrote in the Sun this week defending her plan to introduce a cap on standard variable energy tariffs as consumer magazine Which? reports that thousands of customers will be moved onto those very tariffs this month.
“Like millions of working families,” May begins, “I am fed up with rip-off energy prices.
“So I am making this promise: if I am re-elected on June 8, I will take action to end this injustice by introducing a cap on unfair energy price rises.”
The cap, it is suggested, will help the 17 million customers currently stuck on expensive standard variable tariffs, saving them an average of £80-£100 a year.
That the Tories are planning to cap energy prices was first announced by energy secretary Greg Clark last month; an announcement that was met with staunch resistance from many within the industry. Among these was Iain Conn, chief executive of British Gas’ parent company Centrica, whose shares fell sharply following Clark’s announcement. He joined others in arguing that rather than helping customers, a flat price cap would in fact hinder competition and choice.
It would also, he argued separately, harm Centrica’s profits, and the company would “absolutely be losing money”, should the cap go ahead.
For Conn, the decision to intervene in and regulate the market by introducing a price cap represents a turning away from the free market philosophy central to conservative politics. He said: “I think there are some at the heart of the Government who just don’t believe in free markets. I find that concerning at a time when this market is highly competitive and the UK is seeking to forge a new future relying upon free trade with the rest of the world.”
Similar accusations, though much more forceful (“Marxist fantasy” was the phrase used by David Cameron), were levied at Ed Miliband back when he proposed a similar policy, both in 2013 and in 2015 as part of his election manifesto. The comparison between the two has not gone unnoticed, by the press and politicians alike.
The Sun conceded that the policies are very similar, but explained that they prefer it coming from May’s mouth: “Three years ago we attacked Ed Miliband for suggesting a price cap. With Mrs May we know it’s the furthest she will go.
With Miliband, the unions’ puppet, it was just the start. That’s the difference.”
Politics aside, there are genuine issues with the idea that an absolute price cap is the solution to the problem of a market that is, in one way or another, almost undeniably broken.
The Guardian’s Adam Vaughan explains, reporting on an announcement from Which? that “if billpayers fail to take action when a series of fixed tariffs come to an end in May, they face hikes of as much as 55%, or £416 a year”, when they are automatically pushed onto standard tariffs. The ‘if’ is an important one. Up until now, most efforts to ‘fix’ the energy market, from the likes of Ofgem and the CMA, have been focused on encouraging customers to switch suppliers to avoid costly standard variable tariffs. But switching rates have been broadly flat for some years for various reasons, ranging from customers feeling it is too much of a hassle to change suppliers regularly, to customers not having access to the internet.
The issue is that switching, while some customers may resent the regular input it requires, genuinely does encourage competition and is currently the best way to avoid being overcharged. And that is likely to continue to be the case.
The absolute price cap is something like treating a broken leg with a painkiller. It is not necessarily problematic in itself, but it is unlikely to tackle the underlying issue. Moreover, it may lead to complacency about that very problem; to continue the metaphor you could end up still walking on the broken leg, thinking it’s fine while you’re actually making things worse. Even if variable rates are capped, they’re still likely to be more expensive that fixed rates.
Energy companies make most of their money on expensive standard variable tariffs, allowing them to offer cheaper fixed rate deals. The chances are, fixed rate prices will creep up if variable rates are capped.
Consultants at Cornwall Energy explained: “If suppliers react to the cap by levelling up their prices through removing or repricing cheap fixed deals, many millions of engaged householders could see their bills rise significantly.
“Capping prices may make short-term political sense but in the long term could undermine the market, and may open the door for continuing and deepening interventions in the future.”
Nonetheless, the 17 million or so customers who are on standard tariffs, and those who will join them this month should they not switch, will benefit directly from a cap. And some in the industry, including Sean Fitzpatrick of Ovo, are supporting the cap. Fitzpatrick explained that the cap won’t “harm consumers or competition, but [will] act as a catalyst for innovation and efficiency amongst suppliers”. He added that it would “offer consumers a safety net, protecting them from some of the worst practices of the industry whilst still allowing innovative suppliers to compete.”
The worry is that, as Cornwall highlight, to really make it work, more and more intervention may be required in order to ensure engaged customers don’t suffer for the sake of the disengaged. Other suggestions include the introduction of a relative price cap, as backed by the head of Octopus Energy, Greg Jackson. This would limit the difference between a supplier’s cheapest and most expensive tariff. However, there is no guarantee this wouldn’t lead to similar issues to those mentioned above.
Either way, it is clear that anything that benefits vulnerable energy users is, to that extent, a good thing. And if more and more customers can be persuaded to remain engaged and switch regularly, those customers will be benefitting from better deals.
So for now, the best advice we can offer is: if you’re on a fixed rate deal, keep an eye on the end date, and prepare to switch at the right time; and if you’re on a standard tariff – run a comparison and switch right away. (If you don’t know what kind of tariff you’re on, chances are you’re on a standard tariff, so refer to the previous sentence.)
