Fixing the broken energy market

In an article for Centre Write, John Penrose encourages the Conservative Party to continue being bold in reforming the energy sector….

Whatever you think of the Conservative election campaign, we got one policy offering absolutely right: the energy price cap. We promised a cap that would end the rip-off for 17 million consumers and it was, unsurprisingly, very popular on the doorstep.

But some people feel that if some customers are too disengaged to pay attention, or can’t be bothered to switch, they deserve to be ripped off. They’re grown-ups, after all; why shouldn’t we treat them like adults? It’s their own fault if they’re too stupid or inattentive to notice.

They should be left to suffer.

This simply won’t wash. We need to stop blaming customers for not exhibiting what economists think ought to be ‘correct behaviours’ and start asking why the sector isn’t delivering what consumers want and why. Because, at the moment, contrary to all economic theories, the amount of switching does not increase as the size of the potential cost savings rise.

This shows this market is completely broken. So broken that even the basic laws of supply and demand aren’t functioning properly.

Clearly, we must reform the sector so it behaves like a normal industry where the customer is king – not the regulator, or the politicians.

Markets aren’t natural creations, like the laws of physics. They’re man-made. If we get the rules right, consumers and citizens are top dogs. But if we get them wrong, then prices go up, quality goes down, and either the shareholders or the bosses make out like bandits at our expense.

We need to stop blaming customers for not exhibiting what economists think ought to be ‘correct behaviours’ and start asking why the sector isn’t delivering what consumers want and why

First, we need to make switching simple, quick, easy and safe. There are some detailed, but vital, steps that would make it less stressful and not so scary. If you could change your energy supplier, or your contract, in a few seconds, with a click of a mouse or a tick of a box, the number of people switching would go through the roof.

But persuading us all to behave differently and to switch more will take time, probably years.

And we can’t leave 17 million households to carry on being ripped off while it happens.

All parties, including Labour and the SNP, agreed in their manifestos that we need an energy price cap to stop this sort of behaviour. The 30 or so challenger energy companies that are snapping at the Big Six agree, and have been clamouring for a relative price cap for some time. I think we should listen to them.

Simply put, the relative price cap is a maximum mark-up between each energy firm’s best deal, and their default tariff. It would mean that, once your existing deal comes to an end, if you forget to switch to a new one then you won’t be ripped off too badly.

Energy firms could still have as many tariffs as they wanted, so there would be plenty of customer choice, and competition would be red hot. Crucially, it would be a lot better than an absolute price cap or freeze, which is what Ed Miliband originally proposed, because each energy firm could still adjust prices whenever it wanted, if the wholesale price of gas or electricity went up or down.

Let’s be bold. We have to ignore the Big Six and deliver on our manifesto promises

To their credit, Ofgem realise there’s a problem and they’re trying to fix it. But their proposals are timid, shrivelled, pathetic things which only help two million customers, not the 17 million customers who are being ripped off to the tune of £1.4 billion each year.

Let’s be bold. We have to ignore the Big Six and deliver on our manifesto promises. The prize would be an industry that is fair. That isn’t hated by its customers. And that can hold its head up high at last. •

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