What would an energy price cap mean for consumers?

Theresa May has promised a cap on energy prices if the Conservative party is reelected in next month’s referendum. The claim is that this change will in future cut as much as £100 off bills annually for the majority of consumers.

The proposed policy has generated a lot of coverage over the past few days, so we thought we’d jump on the bandwagon and share some of our thoughts…

What’s all the fuss about?

At the moment, a huge number of customers stay with the ‘big six’ energy providers because they trust companies they’ve heard of, and because it’s easy. The big six use this passive loyalty to their advantage by hiking prices and getting away with it, because in general, people don’t bother to leave them.

In the past few months, five of the big six have raised prices by 10%, adding on average £100 to customers’ annual bills. Fluctuating electricity and gas prices are a constant source of worry for those on the poverty line, and more and more households are now considered ‘fuel poor‘ as a result of recent fluctuations. The number of people having to choose whether to ‘heat or eat’ is widely believed to be one of the reasons for a huge rise in food bank use in the past few years.

What is the energy price cap?

The promised ‘cap’ is not really as radical as it sounds. Although, it would prevent energy companies raising prices, the regulator (Ofgem) would hold the power to change them every 6 months in line with changing ‘costs’ for energy suppliers. We hear a lot from energy companies about ‘unforeseen’ hikes in prices for imported gas etc., and at this point it is unclear whether Ofgem would be just as keen to raise consumer bills to cover these.

What would the energy price cap mean for energy companies?

It could mean a significant reduction in profits for energy companies – or it might just mean profits won’t continue to rise year on year. In reality, the main change would probably be the end of cheap fixed rate tariffs, as energy companies will look for ways to boost profits.

Another possible change would be a reduction in choice for consumers. At the moment, independent/small energy companies rely on people getting fed up of price hikes from the big companies, and swapping to them. If these hikes no longer happen in future, people won’t swap – so the small companies won’t have a customer base! This means no competition for the big six if smaller energy companies close, giving them more power than ever. In addition, all the ‘green’ alternative providers are currently still quite small, and if their profits are threatened there might be less choice for those looking to get their energy from renewable sources.

What else could be done about rising energy bills?

There are two obvious ways that any future government could improve things for customers:

  1. The oft-mentioned (and pretty vague) ‘costs’ cited as a reason for energy companies (and now Ofgem) to raise prices – i.e. primarily the buying in energy from other countries – would obviously be less of a problem if the UK generated more of its energy itself. If more was invested in solar, wind and tidal power plants, the UK could be much more self-reliant, and energy could in theory be cheaper as a result. Successive governments have failed to create viable energy policies, and as a result there’s still the potential for us to be heavily affected by the unavailability of energy from external sources – just like we were in the 1970s oil crisis.
  2. Business Secretary Greg Clark revealed this week that he has never looked at switching his tariff or energy supplier, because it’s a ‘hassle’. It’s the spreading of this misinformation that discourages people from looking for a better deal. It normally takes minutes to switch provider via online price comparison sites – your new supplier does all the work for you. It’s tempting to suggest that if the government really wanted to control the profits of big energy companies and help people save money, they’d raise awareness of the advantages of switching deals.

Would this price cap really do anything to help consumers?

Were the Conservatives to win the election, and implement the changes, it is difficult to predict what impact it would have. It’s possible that a cap would introduce some more stability, but unclear to what extent, and would other impacts it might have. It certainly wouldn’t signal the end of energy prices rising. The ability to predict the readiness of energy supplies is what affects price rises, so balancing demand should be key going forward.