It’s high time we scrapped the energy price cap

This well-meaning Government intervention has done precious little to combat real fuel poverty

Iam not a fan of the energy price cap – not for reasons of ideology, but rather from a practical point of view: because it inevitably distorts the market with unintended consequences.

It was introduced for the best of reasons – to keep energy bills down for consumers and businesses, but it meant that in the good times, when wholesale prices were low, energy bill charges were more than likely artificially high. Now that there is a spike in the price of gas, many of those same companies that did well in the past will now be demanding a taxpayer bailout “to avoid the risk of disruption to supplies”.

So, the Business Secretary, Kwasi Kwarteng, was right to make clear this week that the taxpayer will not be bailing out energy companies that are struggling.

Why? Because this energy crisis is definitely not about energy security. Not only do we have access to our own natural-gas resources, but our imported gas comes from reliable sources such as Norway. It is instead about the price of energy, and specifically the consequences for new entrants to the market that don’t have the deep pockets to be able to deliver within the price cap when wholesale prices are spiking. In short, it is simply a problem of new challengers overreaching themselves.

The price cap was only ever designed to be temporary, to protect consumers while market competition grew, and while efforts to encourage shopping around and switching were bedding in. Now, of course, when that day in the future comes that government seeks to bring it to an end, (having concluded the market is now diverse and competitive enough to deliver affordable energy), just watch the outcry from all those who believe state intervention is the only response.

An energy price cap is a sledgehammer imposed to limit market freedom, albeit for honourable reasons. It curtails competition and sets parameters within which suppliers operate. The real challenge for our politicians is that there are 3.19 million households in England in fuel poverty, for whom price rises are intolerable; for them, heating or eating is already a hard choice. Even with the current level of the cap, their bills are too high, so the cap serves the purpose of pleasing “the many”, but not solving the very real challenge for the few. The Warm Home Discount Scheme and the winter fuel payments are welcome interventions for the so-called “fuel poor”, but subsidising homes with an old gas boiler, draughty windows and an uninsulated roof is a bonkers way to provide help and support, when a heat pump or better insulation could do the job and reduce the carbon footprint at the same time.

It is time for ministers to commission fresh advice on how to remove the cap, and then address the cost of living challenge in a more targeted way.

As with every state intervention that is intended to “protect” the consumer, there will be howls of protest when the cap comes to an end. But in reality what the Government needs to do is speed up the transition away from fossil fuels. One way to go about this is to set a date by when new gas boilers must be phased out. Giving business that certainty will help them to drive down the price of heat pumps and other low-carbon technologies. We have seen exactly this result before. When, back in 2015, we set the date to take coal off the system entirely by 2025, and when we set the date for zero emissions from the tailpipe in the automotive sector by 2035, there was huge pushback from business in each case. But the truth is, business innovation will always get ahead of the deadline once direction is set by the Government. We’ve seen it with coal, and I’ve no doubt we will see it with cars.

The second key step the Government needs to take is to implement the second wave of electricity market reforms. We need an independent system operator that will promote local microgeneration to the grid through prioritising local grid connections, and we need proper local energy pricing, so that an electricvehicle driver in Cornwall knows she can charge her car cheaply when the sun is shining, and a student in Scotland knows he can do his weekly washing on the cheap when the wind is blowing.

A combination of smart meters, local generation and local pricing could have a huge benefit for consumers, and setting hard regulatory deadlines for different sectors to transition away from fossil fuels will be the final piece of the jigsaw as we seek to solve our energy dilemmas.

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