Conservative Home: If the energy cap doesn’t fit…

Greg Clark claims that the Conservative energy price cap plan is different from Labour’s energy price cap plan, and that charges of Tory hypocrisy and opportunism are unfair.  His point may be correct (Ed Miliband originally proposed a price freeze), but it fails to see the wood for the trees – or rather, in this case, the policy detail for the big picture.  Conservatives have denounced price controls as anathema since the Thatcher revolution.  Now her successor is preparing what the former Prime Minister would doubtless have scorned as a U-turn.  Thatcherites prefer to apply that other c-word to policy: competition.

The case for change is that the bigger energy companies – the Big Six – “make hundreds of millions of pounds in profit not because they are cost efficient or provide a great service, but simply because they inherited millions of customers after privatisation, and milk them for as much money as possible”, as the Big Deal, the energy switching site, puts it.  Theresa May claimed today that “in recent months we have seen five of the Big Six energy firms announce yet more price rises for standard tariffs – while analysis shows profit margins hitting record levels. That is despite the fact a Government-backed report last year found households are already paying £1.4 billion a year more than they need to.”

Furthermore, Ministers say, 90 per cent of consumers don’t switch to smaller, insurgent, challenger providers – not because they unwilling in principle, but because they are daunted in practice.  As John Penrose wrote on this site earlier this year, “too many people find switching to a different energy firm stressful and are frightened off as a result. Even the price comparison sites, who have an interest in making it as simple as possible, say that they lose huge numbers of customers who abandon their search the moment they’re asked a basic, essential question like what your current energy usage is”.

The Big Six claim that consumers are simply helping the cover the costs of new investment, plants and infrastructure, all of which have been neglected by successive governments for too long.  But, as Penrose argued, these firms rush neither to let consumers know when they’re being switched on to more expensive tariffs, nor to help them move with maximum inconvenience to other suppliers.  And while the Big Six are quick to shift their prices upwards when wholesale prices rise, they are less swift to move them down when these fall.  The report cited by the Prime Minister today found that between 2012 and 2014 those on standard variable tariffs paid 11 per per cent more for their electricity and 15 per cent more for their gas than those on other tariffs.

It was always likely that May, with her belief in “the good that Government can do,” would intervene with price controls.  Last year, ConservativeHome predicted lower energy bills as one of her four social reform aims, and Ministers have been rattling their sabres, or rather their red boxes, since the start of this year.  Moreover, differentiating her kind of conservatism from Thatcher’s is all part of May’s plan: she wants to demonstrate “the good that government can do”.  The price cap, with her separate tilt against protecting workers’ pensions from the likes of Philip Green, sends a political signal to UKIP and Labour-leaning voters in midlands and northern marginals.

But while it sends a message, will it really cut their bills?  The Prime Minister intends to “protect around 17 million families on standard variable tariffs from being exploited with sudden and unjustified increases in bills.  The cap will be set by the energy watchdog Ofgem and will help close the gap between standard tariffs and the cheapest deals”.  However, this risks applying one of the oldest laws of politics: that of unexpected consequences.  As the Times reports, the energy companies are now “expected to try to protect their profits by scrapping cut-price deals, which can be hundreds of pounds a year cheaper”.  A danger of price caps is that prices move upwards, and cluster below the cap itself.

The market could thus become less competitive, not more.  Potential new entrants may not enter; established suppliers may exit.  It is worth noting that the Government has not gone for the less radical option of a “relative” cap  on the difference between the cheapest and most expensive tariffs, as championed by Penrose.  Nor has it chosen to target the poorest households by using subsidies, such as the Warm Home Discount Scheme.  Instead, it is seeking to help a much larger group – including the “Just About Managings”. Fair enough.  But behind the political signal lurks a political danger: that if the Government seeks to control prices, Ministers will be blamed if they rise.

The long and short of it is that the Government will employ a few clever people who aren’t energy specialists to set the cap.  And the energy companies will employ more clever people who are specialists to find ways of getting round it.  A likely outcome will be Whitehall busily chasing loopholes – as Treasury Ministers do each year in the Finance Bill, as they seek to keep up with those unearthed by accountants.  The timing is interesting.  This policy announcement has come early, before the Conservative manifesto is unveiled.  Could it be that Lynton Crosby views the policy as a “barnacle on the boat” – and wants it, if it must be there at all, not to be newly visible when the ship lauches formally next week?

You may say that these objections are all very well, but that Something Must Be Done.  Quite so.  For example, the Government could take up Penrose’s ideas about making it easier to switch.  And rather than risk that law of unintended consequences for consumers – and indeed producers, if a cap hits investment and jobs – Ministers could look again at the framework within which energy policy operates: namely, the Climate Change Act, and the framework of carbon reduction targets that it put in place.  After all, one of the gains of Brexit will be greater control of our own energy policy.

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