As annual energy bills are forecast to hit over £4,000 from January 2023, Matteo Tiratelli examines the history – and future - of Britain’s ‘price cap’.
As energy prices have boomed over the last 12 months, Ofgem’s six-monthly price cap reviews have become a political flash point. In April, the price cap (which today covers 24 million households) went up by 54%. We’re due another announcement at the end of August, but the most recent estimates are for a further 70% increase, taking us to £3,359 a year, and potentially may top £4000 from January 2023. Now Ofgem has announced reviews will take place quarterly to “adjust much more quickly” to market volatility, i.e. “pass on rises in wholesale gas and electricity prices faster to consumers”, as the Financial Times assessed the change.
The price cap is clearly failing to protect consumers. So, what is it doing?
Ofgem’s price cap is designed to prevent “overcharging” – a subjective assessment of what responsible capitalist profits should look like rather than a reflection of a “fair price” for keeping your house warm. Therefore, about 55% of the cap reflects wholesale energy prices. (This is because the cap is a control on the prices paid by consumers to suppliers, not a control on the market price for energy that those suppliers pay to energy producers like BP and Shell who have announced record profits over the last year.) Another 30% reflects the costs of building and maintaining the energy network and the “operating costs” of the energy suppliers. 10% covers the government’s social and environmental policies, 5% goes to VAT, and 2% is the supplier’s guaranteed profit.
In setting these caps, Ofgem’s central concern has been to prevent energy suppliers from going out of business, even if that means pushing the rest of us to breaking point. But, in many ways, the failure of companies like Bulb is a direct result of Ofgem’s own actions. Energy prices were extremely low for most of the 2010s and, in a short-sighted bid to break the power of the established big six suppliers, Ofgem allowed lots of new companies into the marketplace without doing their due diligence. As energy prices have gone up over the last year, those companies quickly ran out of capital and have had to be bailed out, adding more costs to everyone’s bills and pushing up the price cap even further.
This points to a deep problem with the price cap. You can’t control the cost of energy bills without either also controlling wholesale prices or using tax revenue to pay the difference.
