Experts say that an energy price cap that is designed to end expensive tariffs could actually result in increasing bills. The details of the new cap are set to be published next week. It will reduce the cost of the most expensive tariffs that are paid by loyal customers. However, could put the smaller firms that offer the cheapest deals out of business and it will discourage competition.
The cap is created to put an end to allegedly excessive prices and stop energy firms from punishing loyal customers on standard variable tariffs, which are the most expensive. It is anticipated to save about 12 million customers £100 per year.
Currently, the average standard tariff from the big six suppliers costs £1,131 per year. Based on average annual usage for electricity and gas combined, the cheapest deal, from Iresa Energy, costs £820, having a difference of £311.
The co-founder of price comparison service energyhelpline, Mark Todd, suggested that the new price cap would put pressure on the suppliers’ finances, particularly the smaller ones, which offers the most competitive tariffs.
He said that such cheap deals could begin to disappear, giving bigger suppliers a “stronger grip on the market”. He said that if the regulator, Ofgem, placed the said cap at a cheap price it might “knock many of the little guys out of business.”Suppliers could also start to drive prices up to, or just below, the said cap.
John Melrose, the One Tory MP, implied that a relative price cap could be the answer. He suggested “a maximum markup between each energy firm’s best deal and their default tariff”. This would stop customers from spending too much when their tariff comes to an end, and they are transferred onto a standard variable tariff.
Richard Neudegg, the head of regulation of another comparison service, uSwitch, stated that “heavy-handed regulation” at this stage could “undermine the progress” that was made in boosting customers to change suppliers.
He stated: “A price cap won’t put an end to standard tariffs, or the fact that they are generally the worst value deals.
“It will lull energy customers into a false sense of security and discourage them from choosing something better. This takes the pressure off energy companies to compete for business because they no longer fear their customers leaving them.”