Will a cap on energy prices give customers a fairer deal?


Jason Frayne, Director at Don’t Waste Money, shares his thoughts on the government’s pledge to cap Standard Variable Tariff prices and explores what the changes would really mean for UK energy customers:

The rising cost of energy is an issue for households across the nation, particularly those on a lower income, for whom energy bills make up a large proportion of monthly living costs. It’s no surprise then that the media have been so focused on the prices set and profits gained by energy companies in recent years, or that each election brings with it a raft of promises to ‘freeze’ or ‘cap’ prices. The snap election set to take place in June is no different; intervention in the market seems certain should the Conservative Government remain in power. This time it’s Prime Minister Theresa May pledging a price cap on Standard Variable Tariffs – a powerful promise for the millions of UK households currently struggling to make ends meet. But is fixing our energy price problems really that simple, or could a government imposed price cap actually end up costing customers more in the long run? Let’s take a look at some of the pros and cons of the promised energy price cap…

The good news

Depending on how the price cap is calculated and imposed, it would almost certainly provide some short term protection against rising energy prices to the huge proportion of households who remain on Standard Variable Tariffs (Read our guide: Energy tariffs made easy). It could also mean that energy companies would need to innovate in the types of SVT account they offer and find new ways to differentiate their brand from the others in the marketplace – which is a positive for customers. The price cap which was imposed on prepayment tariffs can provide an example of how suppliers might respond to the new proposed cap: the regulation of prepayment tariffs limited the choices available but also encouraged some suppliers to offer prepayment tariffs with no standing charge or with 12 month loyalty payments, to draw in customers who otherwise had no clear way to choose any one supplier over another. The problem however, as demonstrated by the prepayment example, is that over time basic pricing begins to look fairly uniform. Suppliers are likely to price more closely and this in turn leads to greater apathy and less customer engagement; none of which are the ingredients for a healthy marketplace – whether that be energy or otherwise! So, let’s take a closer look at the negatives of price capping.

The bad news

Whilst the short term protection offered by an energy price cap could sway voters during election season, it is actually unlikely to offer a guarantee of long term savings to energy customers. Here’s why…

The energy market is currently a fiercely competitive place. This benefits customers because it increases the range of products available and the number of good value deals they can access. A price cap would be likely to decrease competition in the marketplace, limiting the types of deal available to customers in the shorter term and perhaps even inhibiting investment in the types of innovation that could make the market more customer-focused and cost efficient during the longer term. Even the types of offers seen on prepayment tariffs wouldn’t offer customers a long term guarantee of a fairer deal – loyalty deals and similar offers mean that the marketplace is less transparent because they make it more difficult to calculate and accurately compare prices.

Any price cap would need ongoing scrutiny and regular adjustment to ensure that the prices set for customers fairly reflect changes to wholesale prices and the costs of distributing energy – set the cap too high and customers will lose out, set it too low and some suppliers may exit the marketplace altogether. Whilst the ‘big six’ suppliers would survive, a price cap could be devastating for the smaller challenger brands who have done so much to shake up the energy marketplace and make it a fairer place for household customers. What this all means for customers is that the price rises will still come, even if the price cap delays them for a while. If the price cap imposed by the government is relative to their low price deals i.e. Standard Variable Tariff prices can only be X% higher than the lowest price deal from the same supplier, it is likely that the lowest priced deals will disappear, switching and competition will be reduced, and price rises will therefore also affect customers on other types of tariff.

It’s all about choice

Deregulation of the energy marketplace began back in 1986, when British Gas was privatised. Soon afterwards the nation’s Electricity Boards were sold off and the journey towards a competitive marketplace began. Progress towards better choice and fairer deals was slow to begin with, but over time deregulation has allowed the marketplace to evolve and today’s energy customer has more choice and easier switching than even before (although many don’t realise it!). It’s vital that we continue this trend. Whilst a price cap on Standard Variable Tariffs can provide a sticking plaster for the issue of millions of households paying too much for their energy, it isn’t the best solution for the marketplace and it isn’t the best solution for customers.

What is really needed is for customers to understand their choices and be able to act on them. Complete transparency combined with fast, simple switching processes are what we should be aiming towards for the UK energy marketplace, so that every energy customer in the UK feels empowered to take advantage of the best deals out there. Our aim here at Don’t Waste Money is to educate householders on the options available to them and to help them switch confidently to a better deal. We’d like to help customers overcome the obstacles to changing suppliers, make the move from their expensive Standard Variable Tariff, and never pay too much for their energy again!

We’d like to see the government join our efforts to educate and inform customers about their options and their rights, rather than giving them the false security of a price cap, which could actually discourage them from comparing the market and looking for a better deal.

 

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