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Why an energy price cap might not be as great as it sounds

It seems to be a popular idea in elections, but could result in pushing up bills

energy bill

With the recent spate of standard variable tariff price rises dominating consumer news, price caps are back up for debate as a potential silver-bullet solution to rising energy bills — as set to feature in the Conservative manifesto (and rumblings of a similar approach from Labour).

A price cap could involve setting a maximum cost energy suppliers can charge for the average standard variable bill.

If you’ve never switched your energy, or haven’t for more than a year, you’ve probably rolled onto one of these expensive tariffs.

On the surface, money off people’s energy bills is a good idea — but concern lies around the effect on competition in the energy market, and whether a cap will actually result in higher bills.

Suppliers may bump their standard plans to the price of the cap, leaving some worse-off than they were. Or suppliers may lower the price of their standard tariff in line with the cap, but this could lead to more expensive fixed deals as they offset the cost of lowering their standard tariff — reducing the amount of competitive deals available.

There’s also worry over customers who have never switched, being lulled into a false sense of security that they’ll be getting a competitive deal thanks to a price cap. The proposed savings from a price cap (the Conservative Party’s plans will reportedly reduce standard variable tariffs by up to £100 per year), pale in comparison against up to £618* currently on offer from switching.

The greatest concern is whether a price cap will actually benefit bill-payers if it removes the incentive for energy suppliers to continuously drive down prices and compete for customers – this could lead to prices actually going up more than they would have done over time.

The Competition and Market Authority’s take

The Competition and Markets Authority (CMA) has already carefully considered price caps.

The CMA ran a two-year long investigation into the energy market that concluded in June 2016 — highlighting the shortfalls of the market and suggesting ways to fix it.

One of the issues that reared its head and continues to do so, is the price we pay for our energy — in particular standard variable tariffs.

As part of their analysis, the CMA considered if a standard variable tariff price cap would help keep consumers’ bills lower. The conclusion was that it should not be proposed as a remedy for credit meter customers;

The CMA believed that:

“the disadvantages of attempting to address the detriment of all SVT customers through a price cap would exceed the benefits”

“[…] potentially resulting in worse outcomes for customers in the long run. This risk might occur through a combination of reducing the incentives of customers to engage, reducing the incentives of suppliers to compete and increased regulatory risk.”

What’s the alternative?

Richard Neudegg, Head of Regulation at uSwitch believes that there are other ways to help more consumers get a good deal, whilst protecting those who are most vulnerable:

“The evidence is clear that boosting markets and competition – not heavy-handed regulation – is the best way to keep prices low and help consumers get a good deal.

“The CMA conducted a thorough and expensive investigation into the energy market and offered a ready-to-go programme to address consumers paying too much on SVTs.

“The remedies should be fully implemented and given time to succeed. This, combined with measures to protect the most vulnerable energy consumers, such as extending the Warm Home Discount, would deliver a fairer energy market for all UK households.”

You don’t have to wait for a price cap

Consumers shouldn’t rest on the idea of a price cap coming into place to reduce their bills, especially those on a standard variable tariff. Switching to a fixed energy deal means your rates for energy won’t increase for the duration of a deal (often 12 months) — saving you up to £618*.

Plus, there are many easy ways to do it: you can do an energy comparison online, over the phone, and uSwitch even lets you send in your bill to run a comparison for you. If you have a QR code on your bill, the uSwitch app enables you to scan it for an instant and accurate comparison.

Then all you need to do if you switch through uSwitch is choose a new deal and give a final meter reading to your old supplier when the time comes.

Read more

What’s a standard variable tariff?

CMA: final remedies

  • Wolsten

    Why is no-one discussing the major driver of increasing energy bills and fuel poverty – namely the impact of the climate change levy and the EU renewables directive? Repealing the Climate Change Act would free up the energy market at a stroke. Of course the government would then have to be open with the public about the amount of revenue they would lose in stealth taxation. From memory a recent official OBR report estimated the cost of subsidising renewables will amount to £200-300 /annum per average household by 2020 with a sharply rising trajectory.

    Come on uSwitch, if you want to be taken seriously, at least acknowledge the costs even if you agree with them.

    • Contax

      The best thig Ofgem can do is remove all standing charges on all utilities which will mean a very small increase in kWh charges, it will make it easier to compare tariffs with just 2 figures to compare. Removing the standing charge means the old, sick and low income would gain, poaching a pan of eggs would cost under 2p instead of 20p to 30p, people who say they can’t afford to give kids warm breakfast could do it this way. A cap on SVT’s would end up killing best deals for those that put in the effort to switch to save money, this would end up charging these people more to subsidise those too lazy to switch. Could also do switching in 7 to 14 day period not 7 weeks like it is. Charities could offer help to those who do not understand how to switch and help them get best fixed monthly DD deals, energy suppliers could let people know which charities are participating. I think this would best method, it would also be easier to take meter readings and work out cost of energy used daily, weekly or monthly so people know what they are really using. I don’t want smart meter just meters with 2 decimal places for more accurate working out useage.

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