The government’s proposed cap on energy prices is likely to backfire
12 October 2017
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Reaction to the announcement on proposed cap on energy prices
Commenting on the announcement that the government will introduce an energy price cap, Julian Jessop, Chief Economist at the Institute of Economic Affairs, said:
“The announcement that the government will impose an absolute cap on energy prices makes little economic sense. It is almost impossible for the regulator Ofgem to find the right price that balances the interests of consumers and suppliers, without distorting incentives or reducing competition. This is best left to the market, which brought about a 25% real-terms drop in electricity prices in the 1990s, before utilities were re-regulated.
“If the price is too low, consumers might benefit at first, but would lose in the long run as suppliers reduce investment or pull out completely. If the price is too high, consumers won’t be helped at all.
“The timing also increases the risks that consumers end up paying more than they would otherwise have done. Given the cap is unlikely to be introduced until next year, suppliers could simply raise prices in the meantime. What’s more, because the cap will only apply to standard rates, suppliers are likely to increase their discounted prices, or withdraw special deals altogether.
“Claims that the new cap will save households around £120 per year are misleading. This figure assumes that all customers would benefit from the safeguard tariff which is being introduced for around one million low income households. But it would not be feasible to offer this lower rate to everyone.
“By introducing such heavy-handed price controls in the energy market, the government is opening up the possibility of yet more intervention in other areas such as rents and incomes – taking the economy in completely the wrong direction.”
Notes to editors:
For media enquiries please contact Nerissa Chesterfield, Communications Officer: nchesterfield@iea.org.uk or 0207 799 8920 or 07791 390 268.
For more on the damaging effects of price controls, 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 announcement that the government will impose an absolute cap on energy prices makes little economic sense. It is almost impossible for the regulator Ofgem to find the right price that balances the interests of consumers and suppliers, without distorting incentives or reducing competition. This is best left to the market, which brought about a 25% real-terms drop in electricity prices in the 1990s, before utilities were re-regulated.
“If the price is too low, consumers might benefit at first, but would lose in the long run as suppliers reduce investment or pull out completely. If the price is too high, consumers won’t be helped at all.
“The timing also increases the risks that consumers end up paying more than they would otherwise have done. Given the cap is unlikely to be introduced until next year, suppliers could simply raise prices in the meantime. What’s more, because the cap will only apply to standard rates, suppliers are likely to increase their discounted prices, or withdraw special deals altogether.
“Claims that the new cap will save households around £120 per year are misleading. This figure assumes that all customers would benefit from the safeguard tariff which is being introduced for around one million low income households. But it would not be feasible to offer this lower rate to everyone.
“By introducing such heavy-handed price controls in the energy market, the government is opening up the possibility of yet more intervention in other areas such as rents and incomes – taking the economy in completely the wrong direction.”
Notes to editors:
For media enquiries please contact Nerissa Chesterfield, Communications Officer: nchesterfield@iea.org.uk or 0207 799 8920 or 07791 390 268.
For more on the damaging effects of price controls, 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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