Kate Andrews

    Tinkering with the energy price cap won’t fix it

    Tinkering with the energy price cap won't fix it
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    In principle, the UK’s energy price cap is supposed to provide a buffer for consumers who might otherwise see their energy bills go through the roof. But governments can’t control international energy prices: a lesson that has been learned the hard way over the past six months, as dozens of energy companies have gone bust, unable to raise prices for customers to reflect increasing wholesale costs. Meanwhile the cap has not stopped bills from skyrocketing: Ofgem’s last price cap went up by 54 per cent, taking the total cost for an average household to just under £2,000 per year.

    Still, if there were any silver lining to this distortive policy it’s that customers (and politicians) know when the changes are coming – in April and October each year – with several months of warning about potential increases. This gives consumers time to prepare and politicians time to consider support packages (as Rishi Sunak did last winter when he announced £9 billion worth of subsidies to help people with rising energy costs).

    This, however, may soon change. Ofgem proposals, announced today, would see the energy price cap adjusted quarterly rather than biannually, leading to more frequent price fluctuations. Ofgem’s argument is that this will better enable companies to plan for changes in energy prices and would better ensure consumer prices reflect the wholesale price of energy – so when costs start to come down, bills can fall too.

    Both points are true. But if these proposals were to be brought in in January – the suggestion currently on the table – it remains likely that energy prices would still be rising, as the European Union has pledged to cut off Russian oil to the bloc at the end of this year. It might also give businesses more flexibility in the short-term, but if prices are still increasing well beyond the cap’s limit, this change is unlikely to save the companies facing administration.

    Many of these factors are out of the UK government’s control – but this raises questions as to why it thought it could ever meaningfully dictate energy price hikes and falls in the first place. Yet more evidence of misguided energy policy, which is now coming home to roost.

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