Utility Week: Time to look beyond the price cap

This article was written by Adam John and originally published on Utility Week.

The latest act in the tragedy that is the energy crisis has seen Ofgem push forward with plans to implement a quarterly price cap as part of its response to soaring wholesale costs.

This minded-to position would make it seem that a bit of tinkering with an existing solution will address the problem. It further adds to the worry that the regulator in 2022 is fixated on addressing the issues of 2018 – a market focused on switching and bargain-basement deals.

Yet these are unprecedented times and as such, they require unprecedented solutions. The conversation must not be what tools we do have, but what tools we could have.

There are a number of options Ofgem and the government could pursue instead of fixating on the price cap. More radical reform, such as introducing a relative cap, should be prioritised. One model previously proposed by MP John Penrose would set a maximum mark-up between a supplier’s best competitive price and their default tariff.

Introducing social tariffs as a more targeted measure is another solution favoured by top industry officials. These would reduce the bills of those in fuel poverty or otherwise vulnerable.

Elsewhere it is well-known that much of the UK’s housing stock is in dire need of better energy efficiency. Government should as a matter of course invest more into upgrading domestic properties – a move that can tackle the dual issues of fuel poverty and the climate crisis.

The future energy market will be one of increased renewable power, one where consumers will have incentives to pursue cheaper, greener energy. If we are to achieve this future of more dynamic pricing, the regulator must look beyond the cap towards how customers use the energy system longer-term.

For its part Ofgem argues a quarterly cap will allow suppliers to more accurately predict how much energy they need to purchase, reducing the risk of further supplier failures. Additionally customers would experience the benefits much sooner when prices fall from their current record highs.

Yet within hours of the announcement grave concerns were raised about what happens when prices increase further, with charity National Energy Action warning the move “opens the door to significant price rises” over the coming winter.

The price cap has protected customers from the high costs of energy, especially in the first months of the crisis prior to the 1 April increase. Yet it was doing something it was never intended to do – keeping prices artificially low.

Going forward Ofgem must act in the interests of the longer-term rather than tampering with existing mechanisms. Focus must be on the types of business models that emerge and how to regulate them while offering consumer protections in a new market.

Failure to do so is likely to result in more consumer woe.