What next for an energy price cap?

August 7, 2017 9:30 am

On Tuesday Centrica became the final company from the Big Six this year to announce a major price rise. This despite wholesale prices falling by six percent between February and May, and signalling an end to the six-month price freeze Centrica committed to in February.

This year, periodically news surfaced that one of the companies were yet again were raising their energy prices with the inevitable tabloid headlines criticising the profiteering energy companies. The companies in turn argued they weren’t, and that government policies were increasing their costs.

Then, during the general election, Theresa May launched a scathing attack on the companies, writing in The Sun that “like millions of working families, I am fed up with rip-off energy prices,” and that a price cap would be introduced by the Conservatives to protect “around 17 million families on standard variable tariffs.” Following weeks of speculation, the Conservative manifesto outlined plans for a price cap. But, it’s important to note that it committed to capping “more households”, rather than committing to the 17 million Theresa May alluded to writing in The Sun.

Theresa May not only generated fury from the energy companies that argued the cap would kill competition in the market, but also from within her own party. Firstly, it was a stolen and rehashed policy from former Labour Party leader Ed Miliband. Secondly, it was deeply anti-Conservative and anti-free market. Thirdly, she had failed to tell senior cabinet ministers that it would be in the Conservative manifesto. Instead of the desired populist boost, it only highlighted Theresa May’s ununified leadership team.

Election

Of course, the election didn’t turn out as anyone expected. Rather than a crushing majority with which Theresa May could drive forward a reforming policy agenda, we got a hung parliament, with a minority Conservative government propped up by the DUP.

The Prime Minister’s weakened position means that the most contentious policies have been abandoned or softened. For the energy price cap, this meant the ball was kicked out of party politics and into the hands of Ofgem.

Ofgem – the independent energy regulator –  was sent a letter by Department for Business, Energy & Industrial Strategy Secretary Greg Clarke and  tasked with looking into how best to protect customers. Ofgem have since said that that it is looking into extending a “safeguard tariff” that already exists for vulnerable customers.

As well as watching the Conservatives fail to gain a majority, energy companies fearful of a resurgent price cap will also have been reassured by of the recent changes within Downing Street.

The departure of Nick Timothy and Fiona Hill following the election campaign has led to a re-assessment of thinking. Timothy was known to be a strong advocate within Downing Street for the price cap, and alongside his fellow co-Chief of Staff had a reputation for withholding key policy developments from the wider government circle. With Timothy gone, and energy advisor Georgia Berry also leaving, it appears that the prospect of an energy price cap has been placed on the back burner.

Equally, the energy companies will be happy to see Chancellor Philip Hammond, who vehemently opposed the price cap, in a stronger position in the Cabinet following the election. Following the poor election result that undermined Theresa May’s credibility, a number of ministers including Hammond are enjoying greater influence in cabinet and government.

Return in the future

However, the Big Sixcan ill-afford complacency, as this could only be a short-term victory. Nothing has actually changed in regard to bills and as apolitically charged summer slips towards autumn and then winter, high energy prices are still a major issue.

The action that Dermot Nolan, CEO of Ofgem, decides to take now will be key. The proposal by Ofgem is to extend an existing cap for the four million households on prepayment meters to a further 2.6 million vulnerable households who receive the warm home discount. However, this falls well short of the price cap on energy bills for 17 million families made during the general election campaign.

In an interview with the Sunday Times earlier this month, Centrica CEO Iain Conn had hinted that as they approached the end of a six month price freeze an increase in bills might be coming. He said that his businesses were “not immune” to the 15% increase in wholesale costs for energy suppliers over the past year and that “We are going to have to pay attention to all of that as we think about pricing.” With each of the Big Six having raised their prices this year, and EDF having done so twice, the question for consumers is whether there will be more increases this winter.

Prices are likely to be driven up by a serious problem the Government faces in regard to gas storage. Centrica’s Rough facility, which the company has announced it will now close because of ageing wells, accounts for 70% of UK gas storage capacity and can meet a tenth of the country’s daily peak gas demand in winter.

With it out of operation, more gas must be imported from abroad at high wholesale costs – costs which are likely to be passed onto consumers by the Big Six. The issue of high energy bills is emotive for voters, and is why it became an issue in the election. If bills continue to go up, rest assured so will the political pressure for more interventionalist policies from government.

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