The answer to lower energy prices: competition, not caps

Posted On: 
15th March 2017

Richard Neudegg, Head of Regulation at uSwitch.com, argues that Government proposed price caps could leave consumers even more out of pocket in the long-term.

Price caps could be a 'death knell' for competition in the energy market which would ultimately harm consumers, says Richard Neudegg.
Credit: 
PA Images

Tomorrow MPs will debate energy prices and the merits of new regulations to bring down consumers’ bills.

There’s no doubt that many consumers are paying too much for their energy. Recent weeks have seen five of the big six and many smaller suppliers announcing rises of up to 15% for electricity.

On paper, price caps might look like a good solution to this problem. Some have called for rules to limit standard variable tariffs (SVTs) in absolute terms, or a relative cap on the differential between a supplier’s SVT and its cheapest plan, to guarantee that consumers pay less.

But unfortunately it’s not that simple. Instead of a magic bullet to bring down energy bills, tinkering with ideas like price caps would leave consumers even more out of pocket in the long-term.

The Competition and Markets Authority (CMA) considered a wide price cap on SVTs in its recent and thorough energy market investigation and found it would do more harm than good. Price caps would actually remove the incentive for energy companies to drive down prices and fight to keep their customers, creating a costly false sense of security for consumers on poor value SVTs, and reducing the chance they will secure a cheaper deal.

A relative price cap would be particularly harmful, as it would simultaneously remove the ability and incentive for suppliers to compete in the fixed deals market, dulling consumer engagement while placing no real constraint on the price of SVTs. It could lead suppliers to raise the prices of both their cheapest deals and their SVTs in tandem, separated by whatever level the cap was set, with suppliers making larger profits than they would in a truly competitive market. This would be a death knell for competition and against the best interest of households trying to keep their energy bills down.

Although the CMA’s package did include a temporary price cap for prepayment customers, it’s important to remember this was because current prepayment meters are only capable of storing a limited number of tariffs in their memory, so prepayment customers do not have access to a full market at the moment.

You may expect a price comparison site like uSwitch to be against proposals that discourage people from changing suppliers. But services like ours will always continue to serve customers who are already engaged in the energy market. We believe the best way to lower bills for all is for policymakers to support solutions which will raise overall levels of consumer engagement and force suppliers to fight harder to keep their existing customers.

This is precisely what the CMA sought to achieve with its proposed comprehensive package of energy market reforms published last year.

Since then, significant progress has been made. Last month Ofgem said that 7.7 million fuel switches took place in 2016, representing a six-year high and 28% increase on 2015. This shows that consumers are more confident than ever when it comes to switching energy suppliers – and it is crucial that we build on this momentum, not stop it in its tracks.

The mere threat of government intervention is giving major suppliers another reason to withdraw their most competitive tariffs from the market, resulting in fewer attractive deals from the brands most recognised by consumers. uSwitch’s data shows the price of the cheapest deals from the big six has risen 32% faster than the cheapest deals across the whole market in recent months.

The upcoming Green Paper on Consumers and Markets is the perfect opportunity for the Government to unambiguously show its support for an efficient, competitive energy market as the most effective way of improving service and driving down prices – to get the right result for UK households.