Matthew Lynn

Why Theresa May’s 1970s-style energy price caps won’t work

The Conservatives used to have a perfectly good method of controlling prices — they called it ‘competition’

issue 29 April 2017

Better access to education. Tax cuts for anyone in the struggling middle. More affordable homes, and more money for the National Heath Service. There is nothing wrong with Theresa May seeking to stake out the centre ground of British politics and stop Brexit turning into a right-wing campaign to turn back the clock. But one might have imagined she’d use conservative means to achieve this, rather than raiding Ed Miliband’s last manifesto for ideas. The proposed price cap on energy companies is an alarming example of Mrs May’s left turn.

There are so many ways in which the price cap is a genuinely terrible idea that it is hard to find space to list them all. But here are four big flaws to be getting on with.

First, there is no evidence anyone is making ‘excess’ profits. The energy sector is one of the most extensively monitored industries anywhere in the world. Last year, the Competition and Markets Authority finished a major review of the industry and concluded there was no need for price caps or further controls, and only recommended minor changes to the market. A similar investigation in 2008 had drawn the same conclusion.

Far from ripping off consumers, the energy business is now so competitive that it can be quite a difficult business to make money in — and certainly a difficult one to break into. Only last year GB Energy Supply, which claimed to be the cheapest supplier in the market, collapsed. If it was price gouging, it wasn’t doing it very well. The high price of power might have far more to do with the European Union’s demand for renewable energy sources and the backlash against fracking, which has made energy almost twice as expensive on this side of the Atlantic than it is in America.

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