A new report from the Centre for Policy Studies (CPS) has called for the abolishment of the price cap claiming it has gone “far beyond its intended purpose.”
The Energy Price Cap – also known as the default tariff price cap – refers to the maximum price a typical household would pay per year. Introduced in January 2019, the price cap aimed to protect customer unable to take advantage of market opportunities by switching providers, for reasons such as infirmity, disability to being on a prepayment meter.
Acknowledging that the price cap was introduced with “the best intentions” to protect vulnerable customers from price-gouging, CPS warned that the energy crisis has mutated the price cap into a “de facto regulated market price” for almost every customer.
According to The Case Against the Energy Price Cap report, the EPC currently covers 29 million households – almost the entire market.
The recent energy crisis has seen prices rise to unprecedented levels – an increase reflected in the price cap. In August 2021 the price cap increased by £139 to £1,277 as energy costs hiked up by 50%. Prices sky-rocketed from there reaching heights of £4,279 at the beginning of this year.
CPS research has shown that for almost two years close to all tariffs have been priced at or just below the price cap.
This has resulted in frozen competition within the energy market, stated CPS, creating much higher prices for consumers whilst also driving inflation.
The CPS speculated that there have also been suggestions over energy suppliers having their profits boosted by the cap paired with lack of market competition.
The report’s findings raised concerns for Dr Craig Lowrey, principal consultant at Cornwall Insight.
“Despite recent reductions in the Default Tariff Cap (price cap), households are still facing bills that are well above historic levels. This has raised questions about the cap’s purpose, its efficacy in safeguarding consumers, and its impact on tariff competition,” said Lowrey.
“In light of this, it becomes crucial to explore alternative measures that can better protect consumers, promote fair competition, and ensure affordable and transparent energy pricing for all. The exploration of options such as social tariffs, energy efficiency initiatives, and various other avenues should be prioritised.
“Any reductions to the price cap should not diminish the sense of urgency in implementing necessary changes. The protection of vulnerable households from high energy bills remains a pressing issue that requires immediate attention.”
To remedy the price cap’s mutated function, CPS has suggested a “wartime to peacetime regulatory regime,” setting out five key principles for a new system:
- Return competition to the retail market – this includes abolishing the price cap in its current form and ensuring the government no longer sets the price of energy
- Stronger protections against fuel poverty – this could include a social tariff for households spending an excessive proportion of their income on energy bills
- Address the ‘loyalty penalty’ for those on default tariffs – this requires more nimble regulation, such as permanently banning acquisition-only tariffs
- Build a resilient energy market for the long-term – so as to prepare for a period of higher and more volatile energy prices if experienced
- Encourage innovation and support net zero ambitions
“Contrary to its original intent, the energy crisis has transformed the Energy Price Cap from a genuine cap to a state price control for virtually the entire market,” said Dillon Smith, CPS energy and environment researcher and report author.
“Utility firms are being actively discouraged from offering new, more affordable deals to customers because of state interventions in the energy market. Competition has all but disappeared, meaning prices are being kept high, further contributing to measured inflation. Government needs to rethink the price cap, and deliver choice and competition for consumers.
“This should come alongside moves to introduce stronger protections against fuel poverty such as a social tariff.”
The Department of Energy Security and Net Zero (DESNZ) welcomed the report as part of it’s ongoing investigation into building a future proof energy system.
“The government will always ensure that the energy market is working for consumers to protect them from sky high bills and that households are getting the best deal,” a DESNZ spokesperson told Current±.
“We welcome this report as part of our ongoing consultation on putting in place regulations to ensure people can access the full benefits of moving to a smarter, more flexible energy system.”