Don’t scrap the price cap

Charrine Liu, CC BY-SA 3.0 , via Wikimedia Commons

Dave Toke says energy companies are seeking to return to rip-off tariffs system

Just as it has been announced that the energy supply companies have returned to making some money, demands are being made to scrap the energy price cap. The energy price cap protects domestic energy consumers against, to put it simply, being ripped off by energy suppliers if you are not subscribing to one of their contracts. Now the right-wing think tank, the Centre for Policy Studies has jumped in to champion the abolition of the price cap and a return to what they describe as competition. Worryingly Jonathan Brearley the OFGEM boss seems to be leaning also in that direction. Although government decided in late August to maintain the cap it remains limited.

That brings me to the first reason why we should keep the price cap – at least in some form. Competition in the domestic retail market did not work for around 20 years of its existence and there is no reason that it will work in the future. There are simply too many, too small, consumers for suppliers to effectively market. The bulk of these consumers do not have the time or the desire to spend a lot of their time checking which suppliers are offering the best rates and then signing off or on to them. I certainly didn’t!

The price cap brought to an end the practice whereby the suppliers rewarded people who signed up to fixed-term purchase agreements and then soaked the rest of the consumers (the majority) who were on so-called variable (read rip off) tariffs. We do not want a return to this! The Centre for Policy Studies claims that this will be avoided if only we abolish the fixed term agreements, which they call “acquisition only tariffs”.

I very much doubt it! The suppliers will just change their tactics and just change their tariffs every little while – probably after an interlude following a quick burst of marketing to pick up consumers before putting tariffs back up later. The Competition and Markets Authority talks about educating consumers to take part in the market. I say, no thanks, I haven’t got the time to play at being a petty capitalist consumer in a market that is really an effective monopoly.

The second reason that the price cap should stay is that it ensures that the money saved on cheap renewable energy schemes stays with the consumer and not diverted down some hole by the energy suppliers. Renewable energy projects that are signed up for “contracts for difference” (CfDs) are giving an increasing amount of money back into consumer’s pockets. The consumers get reduced bills as a result.

This works because CfD contracts involve the generators paying the money back to suppliers when (as they are usually these days) the generators are receiving more than the ‘strike price’ set out in their contract. The way this works is that in the so-called green levies which we pay on our energy bills is a section that funds renewable energy. But when renewable energy saves money these levies turn negative – ie the consumer saves money – or it will do if the suppliers pass on to them the savings in terms of reduced bills.

However, this process is only guaranteed because of the price cap. That is because OFGEM calculates the price cap taking into account these flows of money associated with CfDs. If the price cap is scrapped, ergo, the suppliers can do what they like with the savings for cheap renewables!

Now of course we should have a social tariff that protects the fuel poor. But we need that alongside a price cap, not one without the other.

The trouble is of course that in the post-Thatcher world anything that claims to involve markets is assumed to be the default best solution, even when it patently fails in practice. My own preference would be put the domestic retail energy supply sector into public ownership, about which I shall say more at a later date. But for now, please don’t let them scrap the price cap!

In a few months time you will be able to buy a definitive guide to the renewable energy revolution and how to save the energy industry from the profiteers – this is my forthcoming book “Energy Revolutions – profiteering versus democracy” to be published by Pluto Press

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