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Hot topic: An energy price cap for the UK?

Friday, May 12, 2017


The UK Conservative government announced that it will include an energy price cap if re-elected and this could have a number of implications for the British energy sector

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The British people will go to the polls on 08 June 2017 and, according to the pre-election statements and party programs, the discussion will not revolve only around Brexit (see news of 18 April 2017: ‘UK’s surprise general election would not affect RES auction and project development’ and Hot Topic of 31 March 2017: ‘UK-EU energy cooperation after Brexit: what lies ahead?’).

Recently, a number of Conservative MPs announced that an energy price cap policy will be included in the Tory program for the elections. If the Conservatives win the general elections, it is highly likely the measure will effectively be introduced, since the Prime Minister, Theresa May, claimed that such a policy is necessary because the British energy market does not function properly, and is disadvantaging working families.

Setting a price cap on essential products or services is a topic that has been discussed for many years by politicians on both sides of the spectrum. The support or not for such a measure is largely dictated by the understanding of the two contrasting opinions regarding price caps. Some say, it is the role of the consumer to pursue the best deals in a competitive market, while others believe it is the responsibility of the State to adopt a protectionist role by intervening and setting price limitations.

British tariffs and the Conservative proposal

In the UK there are two types of energy tariffs – fixed price tariff deals and standard variable tariff deals. Roughly one-third of British households switched electricity suppliers in 2017 and as a result they see the fixed price tariff deal applied to them under which they pay up to £1.000 (€1.180) per year. The other two-thirds, or approximately 18 million households, which are less involved in the way they buy and consume energy, have the standard variable tariff deal applied, paying more for their energy bill. When the cheaper fixed price tariff deal for a customer ends, the household is automatically switched to the more expensive fluctuating standard variable tariff deal, unless another fixed price deal is signed. Some of the business models of the “Big Six” suppliers in the UK – British Gas, EDF, E.ON, Npower, SSE, and Scottish Power – rely on this difference in tariffs.

In the beginning of May 2017, a number of Conservative MPs suggested that the party will introduce a cap on standard variable tariffs, thereby affecting nearly two-thirds of British households. Recently, the British work and pensions secretary, Damian Green, emphasised that the price caps policy will be included in the manifesto of the Conservative party, due to be published soon. The proposed policy will allow Ofgem, the UK energy regulator, to change the maximum allowed price for energy bills in different regions every six months and adjust it according to energy supplier costs.

Ahead of the latest general election in 2015, a similar policy measure was promised by the then Labour leader, Ed Miliband, who pledged to freeze people’s energy bills. His promise was ironically harshly criticised at the time by a number of Conservative MPs as a dangerous and inefficient measure, which would bring the UK back to the bygone era of 1970s interventionism.

How will it affect the British energy sector?

After the success of the centrist Emmanuel Macron in the French Presidential elections (see Hot Topic of 28 April 2017: ‘Macron vs Le Pen – The future of French energy politics’), the energy price cap pledge can be regarded as an attempt to reposition the Conservative party ahead of the June elections, in order to capture the political centre and appeal to a broader part of the electorate.

Even though it is not certain that such policy will become reality, the statements of a number of MPs claiming the necessity of a cap to reduce consumers’ energy bills are questionable. Because modifying the leading energy source and undergoing an extensive energy transition take time and investments, it is too early to conclude that the current system does not work and that government intervention is necessary to streamline the British energy transition. Additionally, as an effect of the market liberalisation in the UK, there are currently more than 100 active energy suppliers with new suppliers significantly undercutting the major suppliers’ prices. The CEO of Centrica, Britain’s biggest household energy supplier, Iain Conn, stated that the increases in energy bills are due to “the costs of changing the energy system and policy costs, not profiteering from suppliers”.

Furthermore, the Conservative policy pledge was faced with yet another price increase by the UK’s biggest power suppliers, who withdrew their cheapest deals in response to the price cap announcement. The companies argue that the implementation of such a policy reduces competition, with price caps being considered as a kind of government subsidy, and that the nature of such policy is based on energy price predictions. This price hike would also affect smaller suppliers who are more vulnerable if wholesale market prices spike.

Finally, people who are less engaged in the way they buy and consume energy tend to have the standard variable tariff. This part of the population would likely benefit from the implementation of a price cap. On the other hand, to counterbalance supplier losses, fixed price deals are expected to go up. So, in the era of increasing consumer responsibility, involvement, and the expected shift towards a “prosumer”, imposing a price cap could send the wrong signal to those who have been proactive so far since they might end up on the loser’s bench.

Links:

Financial Times (i)

Energy Live News

Financial Times (ii)

The Spectator

The Guardian

Financial Times (iii)

The Telegraph

Cornwall Insight