Competition, not price caps, is the solution to lowering Britain's energy bills

 
Richard Neudegg
Follow Richard
SRI LANKA-THEME-LIGHT
Government intervention is not the only solution to the lack of competition in the UK's energy market (Source: Getty)

Recent weeks have seen the cost of energy bills climbing up the news and political agenda, as suppliers large and small have imposed eye-watering hikes to their standard variable tariffs.

To date, four of the Big Six (EDF, E.On, Scottish Power and Npower) and several smaller suppliers have announced rises of up to 15 per cent. This has collectively left over 7m households paying more than £530m more to power their homes over the coming year, leading to increasing concern among politicians and discussions of potential solutions.

Next week, MPs will hold a debate on whether the energy market is working for consumers and are likely to discuss the merits of price caps and other regulatory interventions.

Read more: Former Tory minister to lead calls for cap on energy price hikes

There’s no denying that many consumers are paying over the odds for energy. But tinkering with ideas like price caps as a magic bullet to bring down energy bills is a knee-jerk reaction that will leave consumers even more out of pocket in the long-term.

Price caps may sound good on paper, but they would remove any incentive for energy companies to drive down prices and fight to keep their customers, and create a costly false sense of security for customers who are on poor value standard plans. They would be a death knell for competition, which isn’t in the best interest of households trying to keep their energy bills down.

Rather than more intervention, a dynamic and competitive market in which suppliers are actively encouraged to compete on price and customer service is the best way to lower bills. By not fully making the case for competition, political leaders are already creating damaging uncertainty and a situation in which consumers are paying more than they should for their energy.

The mere threat of government intervention is giving major energy suppliers another reason to withdraw their most competitive tariffs from the market, resulting in fewer attractive deals from the brands most recognised by consumers. uSwitch’s data shows the price of the cheapest deals from the big six has risen 32 per cent faster than the cheapest deals across the whole market in recent months.

Read more: Bright idea: Here's why Britain's energy market needs reform

Government intervention is not the only solution to this issue. Indeed, just last year, the Competition and Markets Authority (CMA) conducted a thorough and expensive investigation into the energy market and made a series of recommendations to boost levels of competition and consumer engagement.

Since these recommendations were published, significant progress has been made. Last month Ofgem said that 7.7m gas or electricity switches took place in 2016, representing a six-year high and 28 per cent increase on 2015. This shows that consumers are more confident than ever when it comes to switching energy suppliers – and it is crucial that we build on this momentum, not stop it in its tracks.

The upcoming green paper on consumers and markets is the perfect opportunity for the government to unambiguously show its support for an efficient, competitive energy market as the most effective way of improving service and driving down prices – and do the right thing for UK households.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

Related articles