Will the price cap on energy bills proposed by Theresa May be good for consumers?
Joshua Emden, research fellow at the Institute for Public Policy Research, says YES.
It currently looks like price caps may apply to all standard variable tariffs (SVTs) – the most expensive of which come from the Big Six providers, according to Ofgem.
Given that two thirds of customers are on SVTs, and that the Big Six currently account for over 80 per cent of the electricity and gas markets, a price cap could benefit a huge number of consumers.
While we are hearing some criticise the cap because it limits competition, the market isn’t particularly competitive in the first place. And this is the crux of the matter.
Limiting competition isn’t necessarily a bad thing if it can save consumers money – especially as the government has failed to fix underlying problems with market transparency.
If the price cap were set at the cheapest tariff currently available, many consumers could save over £300.
Ultimately, the government needs to decide which is more important: decreasing people’s living costs, or maintaining a not-very-competitive market.
George Pickering, fellow in residence at the Ludwig von Mises Institute, says NO.
As unlikely as it is that the adoption of a discarded Labour policy will create the surge in Conservative support that Theresa May is doubtless hoping for, the chance of an energy price cap benefiting consumers is even more slim.
Indeed, so exhaustively have the disastrous effects of price controls been demonstrated, both in theory and in history, that economists across the political spectrum have found themselves in a rare state of consensus on the matter.
When governments impose price caps, it makes it unprofitable for producers to expand output, while simultaneously incentivising more and more consumption. These two opposing forces inevitably lead to shortages.
When California imposed a similar energy price cap in the late 1990s, the result was rolling blackouts, the bankruptcy of major energy providers, and new opportunities for market manipulation by companies like Enron, leading to a crisis so severe that a state of emergency had to be declared. The PM should put the welfare of British consumers before her own popularity.