Has the energy price cap worked?

Has the energy price cap worked?

The ‘free market’ ideology took a beating in the wake of the financial crisis, as a single sector brought the global economy to its knees. Left unfettered by regulators, and cheered on by politicians grateful for the tax revenue, bankers simply danced to their own tune. Their resultant recklessness debunked the concept of the ‘invisible hand’, and the idea that marketplaces naturally self-regulate.

The battle to find the right balance between state intervention, and giving firms and industries the freedom they need to flourish has since intensified. Even now, debate rages over issues such as state aid for Flybe, the nationalisation of rail, caps on tuition fees, a minimum savings rate and more.

Among the most high-profile market interventions was the introduction of energy price caps last year. Ironically, a similar idea proposed by then-opposition leader Ed Miliband in 2013 (a 20-month price freeze) was ridiculed by Conservative MPs and media. But the price cap later came into effect under a Tory government, and was championed within most quarters of the press.

After all, many people were paying over the odds, and the market was widely described as ‘broken’. The question now is whether the price cap has actually ‘fixed’ it.

Why was the energy price cap introduced?

Under the guise of rising wholesale costs for electricity and gas, suppliers - predominantly those among the Big Six - steadily hiked default tariffs. These are mostly standard variable tariffs, which customers are allocated once a fixed-term deal expires. And, in the absence of making a switch, these add considerable sums to your bills each year.

To address this, a cap of £1,137 was put on all dual fuel deals paid by direct debit at the start of 2019 (rising to £1,254 six months later, and reduced to £1,179 following the latest bi-annual review), and the regulator Ofgem estimated at the time that 11 million people would save £76 annually as a result. So, one year later, have households benefited from this measure?

New research from Which? suggests they may have. According to the study, customers on default tariffs under the price cap this year saved an average of £15 versus last year, prior to the cap being introduced. 

Additionally, the number of deals costing less than £1,000 has ramped up five-fold when comparing the market on 1 January 2020 versus the corresponding date 12 months prior (63 versus 12). Snapping up one of the 50 cheapest deals that are currently available would also equate to an average annual saving of £103 when compared with the 50 cheapest deals this time last year. And, of these cheaper deals, almost 20 per cent cost less than £900, whereas none fell below this threshold in early 2019.

So what's not to like?

First and foremost, there is a cause and effect ambiguity at play. The implementation of price caps did not happen in a vacuum, and energy prices are also affected by the aforementioned wholesale costs, which have fallen recently. Furthermore, exchange rates, geopolitical events, maintenance costs of the energy network and strategy changes by firms can all impact the prices of deals available. So it's difficult to attribute consumer savings directly to this market intervention.

It should also be observed that, while cheaper deals are ostensibly in greater abundance, customers aren't necessarily paying less. Indeed, among the cheapest 55 deals on offer on New Year's Day in both 2019 and 2020, 29 were more expensive this year compared to 2019.

These tended to be default tariffs, but it crystallises two fundamental concerns. Firstly, that providers are using the price cap as a target, and inflate the cost of any default tariffs that fell below this level. And secondly, that these suppliers seek to fill any price-cap-induced revenue voids by offering fewer competitive deals to diligent switchers.

Switching is still the way to go

Nevertheless, despite the mixed picture, the good news is that consumers are taking matters into their own hands in the most effective way possible: switching. Even with the price caps, those on default tariffs still stand to save hundreds of pounds by shopping around for deals with other providers, and consumer groups expect 2019 to have been a record for tariff switches.

And that is very much the template. Contrary to some analysis, the energy market isn't 'broken' at all. There are dozens of suppliers to choose from, with many competing fiercely for new customers. The process of switching could hardly be easier too - all you have to do as the customer is apply for the tariff with a new provider; give them a meter reading, and then sit back while they arrange the switch with your existing provider over a period of 2-3 weeks. 

There will be no disruption to your energy supply during this period. And, even in the event that your new provider later goes bust (as has happened in recent times), you will be protected by Ofgem's 'safety net', which will simply mean them transferring your tariff to a different supplier. No actions needed from you, nor will your supply be cut off.

Of course, it isn't just the energy market where switching will reap rewards - shopping around for new banking products, investment platforms and insurance providers will invariably put more pennies in your pocket. The switching process is similarly easy in these areas too, particularly with things like car insurance and savings accounts.

Ultimately, the best way to apply downward pressure on prices in any marketplace is to make firms fight for your business. Otherwise, if they can automatically bank on your loyalty (or inertia!), they have little incentive to entice you with better deals. So yes, it is a force for good that price caps can provide some protection for those being ripped off the most. But, by taking matters into your own hands, you can do so much better.

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