26 May 2023

The energy price cap may be lower, but it’s still a dreadful policy


Grateful energy slaves of Britannia rejoice! For your wise masters and their factotums at energy regulator Ofgem will have reduced your typical dual fuel energy bills this summer by 17% – just under double typical prices two years ago, and almost enough to cover the rise in the cost of food. I for one will be putting the thermostat back up to 18oC (those September nights can be temperate) and buying a new boiler to celebrate.

All that has happened in practice, is that the price of gas has fallen, the UK and EU have been more effective than expected in securing LNG cargoes from outside Russia, storage reserves are filling, and the weather has been mild. There remains a risk of a second winter crisis. Analysts are divided on how big an impact it might have, but few expect it to as crazy as 2022, when gas prices were spiking at 10-20 times their normal rate for short periods.

The actual fall in UK prices is 37%. That lower figure of 17% accrues from the novelty of the Energy Price Guarantee, a control on unit prices for gas and electricity that subsidises consumption. It doesn’t mean your energy prices are capped at £2,500 a year, but they would be if you were a ‘typical household’. Larger, poorly insulated homes will pay more, modern well-built box flats less. Now prices are below the ‘cap’ a degree of competition will return between the supply companies, albeit competition limited by further controls on their margins and retail practices.

wrote last year about why this, like all socialist price controls was a bad policy. The noble intent, to shield the public from the consequences of the latest energy crisis, can be more efficiently and affordably achieved through targeted welfare. Taxpayers should not be subsidising the heating of swimming pools or EV charging, which remain preserves of the well off.

What’s more, the moral hazard created by bailing out bankrupt suppliers, failing in turn because of the original price cap policy, adds to long-term costs. While price controls do nothing to reduce the underlying costs of generating power or supplying heat, which in turn are being amplified by suicidal climate policies such as North Sea windfall taxes and banning fracking.

In the medium term the restrictions on competition will mean a smaller number of larger suppliers, less innovation, and the resultant costs hidden somewhere, either on taxes or bills. But payment will surely be due over the years to come. This is a policy rooted in political terror in the face of bad headlines, and the failure of successive Conservative administrations to understand that a ‘climate crisis’ does not mean bad socialist ideas from our interventionist history become useful solutions. It does not mean that state corporatism, the collusion of politicians with large companies to source their supply, at our expense, is the best choice.

Affordable decarbonisation, like any other form of social and economic progress, happens faster when capital is deployed in response to demand by multiple actors competing for your business. Those kind of decisions are nudged effectively by simple carbon taxation, but rendered incomprehensible by the UK’s heady mix of overlapping targets, regulations, charges, taxes and subsidies that see us ‘leading the world’ in paperwork, while not failing to tackle the real challenge.

Voters will not thank the Government for this mess. We all remain worse off. Being a little bit less worse off each much is a relief, not cause for celebration or gratitude. The opposition, meanwhile, are correct to adduce that no one is taking their mad ‘net zero power by 2030’ plans seriously, or that voters won’t realise it would mean permanently higher bills. Many probably assume thanks to the Conservatives’ price cap, only mildly less loopy central planning delusions, and unwise echoing of renewable lobbyists bogus claims about ‘cheapness’, that someone else pays and the bills will be small.

A braver administration would scrap the controls, restore energy markets, and support those in genuine need if there is a second crisis. A wiser one would focus their energies on the supply side, relaxing planning and permitting, opening UK sites for gas exploration, and attracting investment through a guarantee to support consistent, lower and stable taxation. They would hedge their bets with more interconnectors and free trade agreements, not carbon border taxes.

All these demand side measures are a mark of failure. A repetitive and myopic desire to appear virtuous that has ended up casting the party of 1990s energy liberalisation, lower prices and affordable greenery, as the villains of a real crisis which they could not control. Continuing to press on with what they know does not work will not mean we’re better prepared for the next crisis, just even worse off when it hits.

Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.

CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.

Andy Mayer is Chief Operations Officer at the Institute of Economic Affairs.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.