Proposed energy price cap is a dangerous political gesture
6 September 2018
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IEA reacts to endorsement of an energy price cap
Responding to Ofgem’s support for an energy price cap, Julian Jessop, Chief Economist at the Institute of Economic Affairs said:
“The government’s proposed energy price cap is, at best, a pointless gimmick, and, at worst, will actually result in higher bills and lower levels of service for many consumers.
“Ofgem’s cap on the default Standard Variable Tariff should reduce bills for customers currently on SVTs with more expensive providers. But unless the government intervenes to set every single bill, suppliers are likely to offset the costs by raising prices that are not regulated.
“The calculation of the cap is also hugely complicated. Ofgem has to estimate an efficient level of costs and appropriate level of profits, with all sorts of adjustments for wholesale, network and government-imposed costs which are outside the control of suppliers, and an additional premium for uncertainty.
“This is attempting to replicate what the free market is doing all the time (Ofgem will only update the cap every six months). Ofgem itself acknowledges that competition has driven down prices and improved customer service.
“The most vulnerable customers were already protected by safeguard tariffs. The only justification for further intervention is that some customers may be unaware of the scope to save money. But the solution here is to empower customers with better information and make it even easier to switch, rather than hand more control to regulators.”
Notes to editors:
For media enquiries please contact Nerissa Chesterfield, Head of Communications: nchesterfield@iea.org.uk 020 7799 8920 or 07791 390 268
For more from the IEA on energy policy please click here.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems and seeks to provide analysis in order to improve the public understanding of economics.
The IEA is a registered educational charity and independent of all political parties.
“The government’s proposed energy price cap is, at best, a pointless gimmick, and, at worst, will actually result in higher bills and lower levels of service for many consumers.
“Ofgem’s cap on the default Standard Variable Tariff should reduce bills for customers currently on SVTs with more expensive providers. But unless the government intervenes to set every single bill, suppliers are likely to offset the costs by raising prices that are not regulated.
“The calculation of the cap is also hugely complicated. Ofgem has to estimate an efficient level of costs and appropriate level of profits, with all sorts of adjustments for wholesale, network and government-imposed costs which are outside the control of suppliers, and an additional premium for uncertainty.
“This is attempting to replicate what the free market is doing all the time (Ofgem will only update the cap every six months). Ofgem itself acknowledges that competition has driven down prices and improved customer service.
“The most vulnerable customers were already protected by safeguard tariffs. The only justification for further intervention is that some customers may be unaware of the scope to save money. But the solution here is to empower customers with better information and make it even easier to switch, rather than hand more control to regulators.”
Notes to editors:
For media enquiries please contact Nerissa Chesterfield, Head of Communications: nchesterfield@iea.org.uk 020 7799 8920 or 07791 390 268
For more from the IEA on energy policy please click here.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems and seeks to provide analysis in order to improve the public understanding of economics.
The IEA is a registered educational charity and independent of all political parties.
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