Tory energy price cap puts industry in a corner

A cornered energy industry said the Conservative Party's election manifesto pledge to cap prices put “competition at risk”.

Prime Minister Theresa May confirmed the pledge on Tuesday ahead of publication of her ruling her party's manifesto next week.

The move has been widely criticised by the industry and the Tories face accusations of hypocrisy after they attacked an identical promise by former Labour Party leader Ed Miliband at the 2015 General Election.

At the time, Miliband's price freeze proposal was dismissed by the Conservatives as “Marxist”. On Tuesday they were trying to insist that their plan bore no relation to the 2015 Labour pledge.

The industry's lobby group, Energy UK, said further state intervention would undermine changes the industry is making.

Chief executive Lawrence Slade said the plan “effectively risks giving up on competition at a time when we need engaged consumers more than ever”.

“However the solution is not to distort the market as a whole but see through the market reforms, allow competition to drive innovation and benefits for customers, while ensuring that there is targeted support for those most in need.”

The proposed Tory cap would be introduced on standard variable tariffs, which around 70% of households are on. It would be set by energy regulator Ofgem every six months and would help close the gap between SVTs and the cheapest deals, potentially saving families on poor value tariffs as much as £100 a year, May claimed.

Business Secretary Greg Clark said suppliers had been abusing their market position.

"The independent Competition Authority made an investigation into the energy markets and they found consumers were overpaying by £1.4bn a year - that's ranged in the past from £70 to £200 a year on people's bills," he told Sky News.

In January industry regulator Ofgem said there was no clear reason for companies to increase household bills even though it acknowledged wholesale gas and electricity prices increased sharply in the second half of 2016.

Chief executive Dermot Nolan said that when wholesale prices started falling in 2014, many energy companies claimed they could not immediately pass on the savings to customers as they had hedging strategies.

“If that argument is true on the way down, it has to be true on way up as well. If costs are starting to rise then you would expect the suppliers to be hedging out and protecting consumers in that sense,” he said at the time.

Neil Wilson, senior market analyst at ETX Capital said recent 10% price rises by energy companies who thought a general election was still three years away had backfired.

"With a cap it would be very hard for the 'Big Six' to generate the kind of profits they have been able to. With the Conservatives almost certain to win a majority, it’s highly likely the pledge will be carried out,” he said.

“It does seem that a wave of 10% price hikes this spring was bad timing for companies who maybe thought they had a few more years until a General Election and who didn’t bank on the Conservatives going down this route.”

However, not all suppliers were unhappy with the plan. New market entrant Ovo said the proposed cap “will not harm consumers or competition, but act as a catalyst for innovation and efficiency amongst suppliers”.

“It will be painful for some companies, especially those currently taking advantage of customer disengagement, but it will offer consumers a safety net, protecting them from some of the worst practices of the industry whilst still allowing innovative suppliers to compete,” managing director Stephen Fitzpatrick said.