A relative price cap is the key to a free market for energy

Greg Jackson
California Lawmaker Considers Bill Banning Conventional Light Bulbs
A price cap would incentivise energy companies to be efficient rather than misleading (Source: Getty)

"A lack of faith in the free market", "bad for the industry", "a harm to competition" - the proposed energy price caps by the Conservative party have been met with much criticism.

Perhaps surprisingly as an entrepreneur, I welcome the prospect of energy price caps and believe the Big Six firms only have themselves to blame.

Centrica’s Iain Conn suggests the Conservative party’s plan represents a lack of faith in a free market. However, energy has never been a free market in the UK. There are hundreds of pages of regulation, that have been hugely influenced by – and often for the benefit of – the Big Six.

This market is broken by design. By way of example: if a petrol station wants more business, it drops its prices to win new customers. All of its customers, new and old, benefit from cheaper petrol. However, in the energy market, suppliers tempt new customers with loss-leading tariffs and pay for this by increasing prices for everyone else.

You may say similar dynamics occur in other complex markets like broadband. However, in those markets, as soon as the company increases its price, your direct debits go up accordingly. Not in energy. Suppliers leave customers on the same direct debit – only contacting them many months later to explain.

The problem is compounded because unlike mortgages, for example, energy companies and switching sites don’t have to declare both the teaser rate and the long-term rate up front. The teaser masquerades as the real price.

Energy companies have to write to customers about the price hike, but our research indicates that 73 per cent are not aware of receiving these communications. The only real clue is on the bills, which are virtually indecipherable for most people. A design agency declared Big Six bills as breaking all five rules of clear design.

The large energy suppliers have industrialised obfuscation to such a degree that the usual solutions fail. A free market requires perfect information, but The Big Six are such experts at hide and seek that radical action is needed.

So we can’t simply blame "lazy" consumers for not acting. For 20 years, consumers have been exhorted to switch but it’s a rare year where more than 15 per cent do so. Even when consumers do switch, they face the prospect of failure through terrible systems – and massive price hikes just a year later. No wonder they conclude "suppliers are all as bad as each other".

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The inefficient, bloated, formerly nationalised suppliers should tackle their cost bases – but instead it’s easier for them to overcharge customers with every trick in the book. They benefit from creating disillusioned, disempowered customers.

Whilst Octopus Energy prefers John Penrose MP's proposals for a relative cap, an absolute price cap would at least bring relief to millions of households and allow competition to flourish. A ceiling on tariffs would reduce the incentive for the Big Six to hoodwink customers, and reduce the “subsidy” they enjoy from the customers they inherited at privatisation.

With over 40 suppliers in the market, there is plenty of competition, but the benefits of this are only felt by a small minority.

John Penrose’s relative price cap would mean that when suppliers offer low prices to win new customers, existing customers would get low prices too. It would incentivise energy companies to be efficient rather than misleading, and turbocharge competition for consumer benefit, enabling us to get rid of much other regulation, making the market freer. Perhaps that’s what the Big Six are scared of: real competition.

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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.

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