May’s pledge to cap energy prices could short-circuit

London Briefing: Prime minister’s bright idea likely to leave voters out of pocket

Britain’s prime minister Theresa May says that her price cap plan will save some 17 million customers up to £100 a year. But switching to a cheaper supplier typically offers far bigger savings. Photograph:  Oli Scarff/AFP/Getty Images

Britain’s prime minister Theresa May says that her price cap plan will save some 17 million customers up to £100 a year. But switching to a cheaper supplier typically offers far bigger savings. Photograph: Oli Scarff/AFP/Getty Images

 

Prime minister Theresa May has been doing her best to avoid direct contact with the voters since she called the snap June election. But she raised her head above the parapet yesterday on a subject she clearly believes will be a vote-winner: energy bills.

Addressing the electorate through the columns of the Sun newspaper, May pledged that, if re-elected, her government would introduce a cap on “unfair” energy price rises.

This would, she said, protect some 17 million families on standard variable tariffs from being exploited with what she called “sudden and unjustified” increases in their bills.

“Like millions of working families, I am fed up with rip-off energy prices,” she wrote in an article for the tabloid newspaper. “Gas and electricity bills only ever seem to go in one direction, eating up more and more of your monthly pay packet.”

In recent months five of the “Big Six” energy companies have raised their prices, despite new figures showing their profit margins reached a record high last year.

Squabbling

At first glance, then, a cap on price hikes looks to be a good idea – so good, in fact, that the Tories and the opposition Labour party are squabbling over who thought of it first.

It was back in 2013 that the then-Labour leader Ed Miliband promised to freeze gas and electricity prices if his party won the 2015 general election. They didn’t win then, of course, just as they won’t win this time round, barring an upset of epic proportions.

Labour has accused the Tories of hijacking its policy, although business secretary Greg Clark, mindful no doubt that the Tories dismissed Miliband’s “Marxist” proposals as “irresponsible and dangerous,” has been attempting to draw a distinction between the two plans.

A Labour-style freeze would block bills from coming down if wholesale energy prices fell, he said, stressing also that the Tory price cap would be set by the industry regulator, Ofgem, rather than by politicians.

While the promise of lower bills will appeal to voters, will consumers really benefit from a price cap? And what are they being offered that is not already available to those who can be bothered to switch to a cheaper supplier?

Stifling competition

Predictably, the big energy suppliers are vehemently opposed to price caps. Centrica, which owns British Gas, has already warned that the move could push up prices by stifling competition and curtailing investment.

Other organisations were vocal in their criticism. The Institute of Economic Affairs said the “crude intervention” in the market would not guarantee lower prices and could well backfire as energy companies hike bills before it can be brought in.

Sam Dumitriu of the Adam Smith Institute pointed out that when Miliband proposed his freeze, the Tories opposed it. “The facts haven’t changed since then, only the politics,” he said.

The Confederation of British Industry, while agreeing that customers must be “put at the heart of the energy market”, is also unconvinced. “A major market intervention, such as a price cap, could lead to unintended consequences, for example dampening consumers’ desire to find the best deal and hitting investor confidence,” warned deputy director-general Josh Hardie.

Consumer groups are broadly in agreement, with MoneySuperMarket describing the proposals as “a disaster” for most customers.

The danger with intervening in the market in such a way is that many of the best deals would disappear, pushing up overall prices and taking away any real incentive to change supplier.

Switching mechanism

The government should instead be doing everything it can to encourage consumers to take advantage of the switching mechanism that already exists.

Some two-thirds of UK households are sitting on expensive standard variable tariffs, even though they could save hundreds of pounds a year by taking their business elsewhere.

Even the prospect of cutting bills by as much as 25 per cent isn’t enough to rouse some consumers into action – including, it seems, the business minister.

Clark admitted yesterday that he had not changed supplier because of the “hassle”, defending his inertia by saying customers shouldn’t have to “go through the fuss simply to avoid being ripped-off”.

May says that her price cap plan will save some 17 million customers up to £100 a year. But switching to a cheaper supplier typically offers far bigger savings.

The trouble is, simply encouraging lethargic consumers to take advantage of what’s already available doesn’t sound quite so exciting in an election manifesto as some tough-talking on “rip-off energy prices”.

Fiona Walsh is business editor of theguardian.com

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