On August 25th, UK energy regulator Ofgem will announce the latest price cap rates, but there are growing calls from within both Ofgem and the government for the end of the energy price cap altogether.
Next week’s announcement will confirm the cost of gas and electricity for millions of households this winter, with the new price cap applying from October 1st until December 31st.
The question being raised, however, is whether the price cap is still fit for purpose, or if it is now doing more harm than good.
What is the energy price cap?
Originally introduced in January 2019 by Theresa May’s government, the energy price cap is a maximum limit set on the unit prices for gas and electricity that energy suppliers can charge their customers out of contract.
Before the price cap, at the end of your contract you could find yourself paying exorbitant prices for energy without realising as suppliers were free to set their own out-of-contract prices.
While it’s usually expressed as an annual total, currently £2,074 a year, the price cap is actually a per-unit limit. Customer’s bills are based on their actual usage, but to make understanding the cap easier it’s expressed as the annual bill for a typical family of four.
The price cap and the energy crisis
When the price cap was established, it was intended as a ceiling on domestic bills. Energy companies competed against each other to offer better value fixed-rate tariffs, and so domestic energy costs were kept low in line with wholesale prices. Customers on price-cap tariffs had dozens of cheaper tariffs available to switch to.
When the energy crisis sent these wholesale prices shooting upwards, energy companies stopped offering better value tariffs. Instead, the price cap became a floor on energy bills. As it had been set before energy prices jumped it was now the best value available tariff.
The price cap was changed to be updated every three months to try and keep up with the record-high energy prices. However, the adjustments put the cost of gas and electricity out of reach for many, with the number of households in fuel poverty reaching 7.5 million.
To combat this, the government introduced an energy price guarantee. Rather than the price cap, which is set based on wholesale energy prices, the guarantee was a government scheme based on what was considered an affordable price for energy.
This placed the guarantee below the price cap, with the government paying the difference to energy companies directly. As wholesale prices have fallen, the price cap dropped below the level of the guarantee. The energy price guarantee is now obsolete.
Who has proposed the end of the energy price cap?
Ofgem chief executive Jonathan Brearly may be about to set the new energy price cap, but in a recent Guardian interview, he called once again for a change in how the government controls energy prices.
Speaking about the current system, Brearly said ‘The price cap was designed for a market that was much more stable – so, pre-2020,’ and described it as ‘a very broad and crude mechanism [that] is going to have risks as well as benefits.’
Brearly has been critical of the price cap for some time – in his January address to parliament he stated that ‘It is my view that we should be exploring more flexible ways of achieving the aims of the price cap’.
The Ofgem executive is not alone in his view either. The Independent quoted an anonymous Conservative party insider who revealed ‘There was a general understanding last year that the cap’s time had come, had been superseded by events and shown not to work.’
Treasury Commissioner Amanda Solloway MP was quoted in the government’s plans to ‘strengthen the retail energy market’. Official portrait, 2020, licensed under CC BY 3.0.
What would replace the price cap?
If we were to see the end of the energy price cap, what would be its replacement? One suggestion is to replace the broad price cap with a social energy tariff. This would specifically support vulnerable households by allowing them to purchase energy at below-market rates.
Brearly has said that Ofgem would ‘work with government on all options, including a social tariff’. However, since the social tariff was first proposed in last year’s autumn statement it seems to have dropped from the agenda, with no mention in the government’s recently published plans to strengthen the retail energy market.
Instead, the plans focus on protecting the resilience of the energy market and offering consumer choice. Customer savings will be achieved through a focus on renewables and new technologies, including ‘tariffs offering lower prices at certain times of the day, smart chargers that automatically put users on the lowest rate to charge electric vehicles or opportunities to buy shares in renewable energy in return for electricity bill discounts.’
While these proposals do indicate a welcome shift towards sustainability, they do nothing to support households in fuel poverty specifically. In fact, schemes like smart charging and the opportunity to invest in renewables are likely to benefit households with disposable income who can take maximum advantage of the schemes over those that are already struggling.
Do you think the energy price cap is still an effective way to protect customers? Would you prefer to see the introduction of a social tariff, or do you have your own proposal for how the government should handle energy costs? Let us know using the links below.
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