Report Calls for Abolishing Energy Price Cap to Promote Competition
A new report from the Centre for Policy Studies (CPS) has urged the government to abolish the energy price cap implemented by Ofgem. According to the report, the cap is preventing customers from accessing lower tariffs and contributing to inflation. The CPS argues that the cap has gone beyond its original purpose of protecting customers and has become a de facto regulated market price.
The report highlights that almost all tariffs have been priced at or just below the capped level for almost two years, with no indication that this will change in the near future. This effectively means that the government is setting the market price for energy, eliminating any chance for customers to switch to better deals. Dillon Smith, energy and environment researcher at CPS, emphasizes the need to move from a wartime to a peacetime regulatory regime by abolishing the cap and returning to a retail market with competition at its heart.
Stronger Protections Against Fuel Poverty
In addition to abolishing the price cap, the report calls for stronger protections against fuel poverty. It suggests implementing a social tariff for households that spend an excessive proportion of their income on energy bills. The report also addresses the issue of the loyalty penalty faced by customers on default tariffs and emphasizes the importance of building a resilient energy market for the long term.
Craig Lowrey, principal consultant at Cornwall Insight, supports the need for alternative measures to protect consumers and promote fair competition. He highlights that despite recent reductions in the price cap, households are still facing bills that are well above historic levels. This raises questions about the cap’s purpose, its efficacy in safeguarding consumers, and its impact on tariff competition.
Profits from Customers’ Energy Bills
A separate study conducted by Future Energy Associates (FEA) suggests that household energy suppliers could collect £1.74 billion in profits over the next 12 months from customers’ energy bills. The study reveals that the profit allowed per year from the average customer on the variable tariff has surged from £27 in spring 2017 to a high of £130 in early 2023, currently standing at £60 per customer.
The study excludes any profits made through Ofgem decisions related to COVID and Ukraine allowances, which contributed to the recently announced high profits for British Gas and Scottish Power. FEA advises customers to exercise caution when considering switching and fixing tariffs but acknowledges that there are some deals worth considering.
Energy UK responds to the report by highlighting that suppliers have lost £4 billion over the last four years, which the analysis overlooks. Ofgem has also stated that while it expects many suppliers to return to making profits this year, it must be seen in the context of recent losses. The majority of customers are on price-capped tariffs set by Ofgem to ensure fair pricing reflecting the costs of supplying energy, and this is unlikely to change significantly in the coming months.
Overall, the CPS report calls for the abolition of the energy price cap to promote competition in the retail market. It also emphasizes the need for stronger protections against fuel poverty and the loyalty penalty. As the government considers the future of energy regulation, these recommendations will likely play a significant role in shaping the industry.