Ofgem energy price cap ‘costing consumers money and driving inflation’

Government urged to move 'from a wartime to a peacetime regulatory regime' by abolishing price cap.

Ofgem’s energy price cap is preventing customers from accessing lower tariffs, contributing to inflation and should be abolished, according to a new report.

The cap has gone “far beyond” its original purpose of providing protection for customers to become a “de facto regulated market price”, centre-right think tank the Centre for Policy Studies (CPS) said.

For almost two years almost all tariffs have been priced at or just below the capped level, with no evidence this will change in the near future – meaning the Government is effectively setting the market price for energy and eliminating any chance of customers switching to a better deal, CPS energy and environment researcher Dillon Smith said.

The report urges the Government to move “from a wartime to a peacetime regulatory regime” by abolishing the cap and returning to a retail market “with competition at its heart”.

It also calls for stronger protections against fuel poverty, such as a social tariff for households spending an excessive proportion of their income on energy bills, tackling the so-called loyalty penalty for those on default tariffs and building a resilient energy market for the long term.

Mr Smith said: “Contrary to its original intent, the energy crisis has transformed the Energy Price Cap from a genuine cap to a state price control for virtually the entire market.

“Utility firms are being actively discouraged from offering new, more affordable deals to customers because of state interventions in the energy market. Competition has all but disappeared, meaning prices are being kept high, further contributing to measured inflation.

“Government needs to rethink the price cap, and deliver choice and competition for consumers. This should come alongside moves to introduce stronger protections against fuel poverty such as a social tariff.”

Craig Lowrey, principal consultant at analysts Cornwall Insight, said: “Despite recent reductions in the price cap, households are still facing bills that are well above historic levels. This has raised questions about the cap’s purpose, its efficacy in safeguarding consumers, and its impact on tariff competition.

“In light of this, it becomes crucial to explore alternative measures that can better protect consumers, promote fair competition, and ensure affordable and transparent energy pricing for all.

“The exploration of options such as social tariffs, energy efficiency initiatives, and various other avenues should be prioritised.

“Any reductions to the price cap should not diminish the sense of urgency in implementing necessary changes. The protection of vulnerable households from high energy bills remains a pressing issue that requires immediate attention.”

The CPS report comes as a separate study suggests household energy suppliers could collect £1.74 billion in profits over the next 12 months from customers’ energy bills.

The first Warm This Winter Tariff Watch report, produced in partnership with Future Energy Associates (FEA), said suppliers have seen the profit they are allowed to make every year from the average customer on the variable tariff surge from £27 in spring 2017 to a high of £130 in early 2023, and currently £60 per customer.

The figures and predictions exclude any profits which firms might also make through Ofgem decisions relating to Covid and Ukraine allowances, which contributed to the recently announced high profits for British Gas and Scottish Power, the report said.

FEA urged customers to exercise “extreme caution” when thinking about switching and fixing tariffs, but said there are some deals worth considering.

Throughout the first few months of 2023 there were just five fixed tariffs available to small sections of the market; however in July alone that number doubled, with ten fixed tariffs newly available on the market.

Simon Francis, co-ordinator of the End Fuel Poverty Coalition, which is part of the Warm This Winter campaign, said: “This report shines a light on the murky depths of Britain’s broken energy system. Without fundamental overhaul of the energy grid and energy tariffs, households will continue to lose out while suppliers will profit.

“Energy supplier profits predicted for the next 12 months could easily cover the cost of a ‘help to repay’ energy debt scheme and leave quarter of a billion pounds left over.

“But, in addition to network reform and immediate support, we also need to see urgent and sustained action to reduce our reliance on high levels of energy consumption, such as improving the energy efficiency of homes, driving an increase in cheap renewables, and a move away from the fossil fuel profiteers of the past.”

An Energy UK spokesman said: “As Ofgem recently stated, suppliers have lost £4bn over the last four years – something which this analysis appears to have overlooked. So it’s clear that the theoretical margin allowed in the price cap does not equate to profits made in reality – showing the flaws in basing future projections on that.

“Ofgem has also stated that, while it expects many suppliers to return to making profits this year, this must be seen in the context of these recent losses.

“It’s also worth stressing that the vast majority of customers are on price-capped tariffs, which Ofgem sets to ensure that customers pay a fair price reflecting the costs of supplying energy – and this is unlikely to change significantly over the next few months.”

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