Energy Price Cap – a Disservice to Consumers

Abstract

The UK energy regulator Ofgem recently announced that it would be capping the standard variable tariff that gas and electricity providers can charge consumers, having been tasked to do so by the Domestic Energy Gas & Electricity (Price Cap) Act 2008. The aim that the Government pursues with this legislative measure is to protect the most vulnerable consumers, who are unlikely to switch providers, by limiting the amount providers could charge. This paper will question whether consumers, in particular vulnerable consumers, can effectively be protected by a price cap. In order to achieve this, this article evaluates the approach taken by the Government and the underpinning assumptions about the state of the market, the true vulnerability of consumers, and the likely effects of price intervention on competition. Our analysis shows that the potential gains of a price cap are outweighed by the negative effects of the intervention, which means that vulnerable consumers will likely be left worse off in the long run. This article therefore proposes an alternative approach: considering the above factors, it concludes that regulation of the contractual renewal process would achieve the aims of the Government without the additional negative effects of a price cap.