The Government is bent on overseeing a rudderless energy price cap
To be effective, an energy price cap must tackle the cause of high prices – otherwise suppliers will still have the upper hand, warns Alan Whitehead
There may well be an energy price cap on its way. If that sounds a little cautious, it is intended to be. After all, the ‘price cap’ that has now been announced by the government is a result of some history of wobbles and equivocation about whether there should be a price cap at all.
It was mentioned as a commitment in the Conservative manifesto. Theresa May apparently then went cold on the idea, only to revive it at the Conservative party conference.
Then there was a period of equivocation with the government suggesting that Ofgem (the industry regulator) could introduce a price cap within its own powers if it wanted to, but declining effectively to instruct Ofgem to do it, and Ofgem rejoining to suggest that they would need primary legislation to be sure of implementing a cap.
Then, eventually, the publishing of a bill to introduce a price cap, which is to be the subject of pre-legislative scrutiny by the BEIS Select Committee.
Already there has been some press speculation that the government intends to pull price cap legislation if the large energy companies take action to end standard variable tariffs (SVTs) and move to fixed-term tariffs instead.
Altogether, about the most half-hearted attempt to put a price cap in place that you could imagine and, furthermore, one that will certainly miss any cap on prices for this winter, and possibly far into next year as well. In the context of the first date for lifting the cap (placed in the bill, set at 2020), we could well be seeing a price cap (if implemented) that lasts effectively for 18 months and is then lifted.
This is, really, no way to run a price cap. If the case for a price cap is there, then it should be implemented as soon as possible, and the government’s procrastination and an eventual very leisurely piece of legislation to bring about a cap achieves the opposite. And there certainly is a case.
The Competition and Markets Authority, in its review of competition in energy retailing, concluded that energy companies had effectively overcharged customers by £1.4bn per year. Price rises on energy bills over the last year have been running into double-digit percentages while the wholesale price of energy was falling or remaining stable.
Something had to be done in the face of what seems to be a tin ear on complaints about price rises and their justification from the big energy companies.
Labour therefore supports the idea of an immediate price cap, and would have wanted it to be clearer, quicker and more decisive than what we may have now. But there is an important difference between Labour’s idea of a price cap and what we seem to have coming from the government. This is simply that, if a price cap is envisaged then it must have a purpose to it, rather than just a temporary freeze to ‘punish’ energy companies and then a return to business as usual. It doesn’t take much imagination to see that under such circumstances energy companies are likely to suck up the short-term pain and then just restore losses by adding price rises to their tariffs at the end of the freeze.
Labour would want to use the cap period to get to grips with the causes of high price rises and excessive profiteering and change the market so it could not happen again. To do that need not require permanent regulation of prices but certainly would involve measures to make trading of wholesale energy transparent and fair, and the introduction of a ‘pool’ trading system so that everyone knew who was trading in as generators.
This transparency would ensure that vertically integrated energy companies were not effectively trading with themselves and transferring price costs as a result, and that there was a level playing field for all energy purchasers based on full knowledge of trades right down the curve. A similar system, which does bear down well on excessive prices, known as Nord Pool, already operates for trading in several Scandinavian countries.
I still hope that the government can be persuaded to redraft its own price cap bill so that it works in this way, and that the cap will remain in place until such changes to the market are effected. It would not take much to transform a rudderless cap into an effective cap.
However, I fear that instead the government is bent on seeing how little it can get away with because, in their hearts, many on the government side never wanted to see a price cap introduced, and the sooner they can end it, the better.
Alan Whitehead is Labour MP for Southampton Test and shadow energy spokesman