Price Caps Are A Plaster On Our Broken Energy Market
By Griffin Carpenter – New Economics Foundation: Five years is a long time in politics, it was only in 2013 that energy price caps were ridiculed by the Conservatives in their campaign against ‘Red Ed’. But as increasing media scrutiny has highlighted that consumers are paying hundreds of pounds a year on the wrong tariff, Tory Party leaders have learned to love regulation. But with regulation after regulation added to the energy market, isn’t it time to rethink our whole approach?
From top to bottom the energy market isn’t working. By-in-large, the ‘Big Six’ continue to operate as regional monopolies. In recent years, a barrage of headlines focusing on rising energy prices have encouraged more people to switch tariffs. However, switching has failed to reduce energy prices or cut into industry profits. Even when customers do switch tariffs, about one-third end up paying more.
This lack of consumer power has put Ofgem, the energy regulator, in a tricky position. Ofgem’s central mission is to promote competition within the energy market as a means of delivering low cost energy. When competition fails to deliver lower prices for consumers, Ofgem is forced to deliver on contradictory goals.
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This tension was clearly exposed when Ofgem chief, Dermot Nolan, was recently grilled by MPs regarding the regulator’s role as “a bystander, rather than an active participant in the market”. Nolan responded that he wished they had moved earlier to put price caps in place and would therefore not accept a bonus, but at the same time, he was clear that he did not actually support the use of price caps (preferring a competitive market as an ideal). Nolan’s response is confusing, but one that highlights the limits of Ofgem’s central mission to promote competition in all cases. It’s difficult to fix the broken system with only hammers for hands.
To be clear, energy supply, whether in the form of electricity or gas, is not like other product markets. Despite the hundreds of tariffs on offer, most customers simply want the lights to flick on at as low a price as possible. In this sense energy is a very uniform product. You certainly don’t hear about the millions of Britons using the ‘wrong shop’. This is how Greg Clark, Business and Energy Secretary, has referred to the “poor value” and “rip-off” energy tariffs currently paid by 11 million households.
This only begs the question, what then are energy companies for? This is a surprisingly difficult question to answer. Formally, the function of energy retailers is to purchase energy from the wholesale market or directly from generators, and supply it to householders – but this does not explain why the industry operates as a retail market. Even the companies themselves are at a loss to explain.
Some point to good customer service as a reason why consumers stick with their current provider instead of switching. Yet this explanation is not supported by customer experience: energy companies operate in one of the least popular industries in the country. Stranger still, Which? surveys reveal that the more customers an energy company has, the less happy its customers are.
While it is true that the proposed energy price cap will save many households money, it is suspected that energy retailers – opposed to this idea – are already increasing their prices in anticipation of the cap. But regardless of the degree to which price caps can reduce the amount we are being overcharged by, a more fundamental rethink of our energy system is required.
First, when it comes to addressing the problem with energy pricing, too much focus is placed on retail energy. For consumers, companies who make up the Big Six are the face of our energy supply, but in terms of excess charging, it is the electricity and gas networks like National Grid that are recording “eye-watering” profits with little public scrutiny.
Second, the role of competition in the energy market needs to be taken off a pedestal. Competition is a means to an end, but that end isn’t being met. Starting from the wrong premise will almost inevitably lead to the wrong conclusion.
Third, any meaningful reform of the energy industry requires us to revisit the whole system of energy provision. Yes, that could mean the nationalisation of energy supply, although with an increasing number of regulations to control prices, the step to nationalisation has become much smaller.
A new system of energy provision could also involve the scaling up community-level alternatives. There are many examples of hybrid forms of public ownership in energy infrastructure and retail. Given the problem of disengaged consumers, community energy holds the potential to empower people to take control over how their energy is supplied. Action should also be taken to empower the increasing number of people in the UK who are not homeowners and therefore have limited control over their energy choices.
There is a strong desire in politics to be seen as doing something to address a widespread problem. While the proposed energy price cap is undeniably something, it will fall short of what is required to fundamentally change our energy system. Until the underlying premises of the system are scrutinised, these regulations provide no more than a plaster over our broken energy system.