Should the Ofgem energy price cap be scrapped?

Energy bills will fall in October from £2,074 to £1,923 a year for the typical household, Ofgem has announced.

The slight reduction is because of the latest update to the energy price cap, which “lays out the maximum amount that energy suppliers can charge per unit of gas and electricity on standard variable tariffs”, and is “meant to protect customers from being ripped off”, said The Times.

However, even under the regulator’s new cap, the average household energy bill will still be “hundreds of pounds higher” than it was in the winter of 2021, when it was £1,277, said the BBC.

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And with the end of the government’s £400 universal energy support, which was paid in monthly instalments from October 2022 to March, one in three households are likely to pay more for their energy bills this winter than last year, according to a study by the Resolution Foundation think tank.

What did the papers say?

The lower price cap is a “move in the right direction” but poorer families “could end up spending more”, wrote Gurpreet Narwan, business correspondent for Sky News, because “the composition” of the price cap “hurts them disproportionately”.

The Resolution Foundation told the broadcaster that because the daily standing charge that customers pay has been rising, “the biggest falls in bills will be seen by households who use the most energy”, while “households who consume relatively little energy will face higher energy bills this winter than last”.

Competition has “all but disappeared” from the retail market, wrote Dillon Smith, researcher for energy and environment policy at the Centre for Policy Studies, for CapX.

The price cap was “conceived of in yesterday’s (benign) market”, he argued, but “in today’s world it is self-evidently no longer fit for purpose”. Higher prices “could be with us throughout this decade and beyond”, while “volatility could well return this winter if the weather doesn’t cooperate and Putin decides to play tricks.

“If so, this is a recipe for another ‘temporary’ intervention to become permanent, while the public becomes used to the state setting the price of energy, undoing much of the hard work of privatisation,” he added.

“In a normal market,” said City A.M., “high prices would be passed on to customers. But the energy price cap forbids suppliers from doing that,” it added, “so Ofgem has been forced to move in a different direction – one that will give them greater confidence suppliers will keep their heads above water, but will do little for competition in the energy sector”.

It has been “near impossible” for “smaller, challenger players” to “survive a situation where they were unable to pass on a sustained hike in wholesale costs to customers”, it said. And “the risk is that unless the price cap is removed, further collapses could happen again”.

What next?

Among those calling for a rethink on the cap is the very man who sets it. Ofgem’s chief executive, Jonathan Brearley, “appears unconvinced that the energy price cap is the best way to help hard-pressed bill payers”, said The Guardian.

So Brearley is calling on the government to decide whether the “very broad and crude” measure of the past four years is still fit for purpose. “The price cap was designed for a market that was much more stable – so, pre-2020 – and it worked quite well,” he told The Guardian, “but in this volatile market, the price cap has costs as well as benefits, so we would welcome a debate on the future of pricing regulation.”

For Brearley, “the question is, and it’s an open question: are there alternatives? Are there other ways of doing the same thing?”

A solution that has found “broad support across the industry and at Whitehall” is a “social energy tariff”, said The Guardian. It explained that “unlike the price cap, the tariff would be set below the cost of supplying energy, so that households in fuel poverty could better afford their bill”.

Reforms to the price cap should “go hand-in-hand with expanded support for lower-income and vulnerable customers”, agreed Dillon. The government “should thus bring in a ‘social tariff’ as many have suggested”, with “more sophisticated targeting aimed at those spending an excessive proportion of their income on energy bills”.

However, said the National Institute of Economic and Social Research’s Professor Jagjit S. Chadha last year, a variable price cap does have “one big limitation because not all those who need help are low-energy users”. For instance, low-income households in “colder, wetter parts of the country”, those with “more dependants (including disabled relatives)” or those “living in poorly insulated homes” would not benefit from the principle.