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John Penrose is a former Cabinet Office Minister. He is MP for Weston-super-Mare and the Prime Minister’s anti-corruption champion.

Monday was a great day. The Government at last published the long awaited energy price cap bill that I and 212 other MPs from all parties campaigned for – and that millions of customers need.

But how can we square our Conservative values with something as interventionist as an energy price cap?

Well, there are two parts of the domestic UK energy market. One is an ultra-competitive part that serves up great-value deals for customers who switch every year (ten per cent of us) where prices move around every day. If the whole thing was like that, there’d be no problem at all.

But the other part is a disaster: hideously uncompetitive and expensive, where the most loyal customers are put onto the worst-value deals without their consent or knowledge and are left paying too much for years and years. Between 16-17 million of us are  onone of these expensive “default tariffs” and, if you don’t know what you’re paying for your energy, you’re almost certainly one of them.

The Big Six energy firms specialise in milking this ‘back book’ of loyal customers. They reel customers in with cheap starter rates and then quietly move them onto the higher tariffs once the initial deal finishes and the rip-off begins. Most of us are too busy or forget to switch when the time comes and others, especially older customers, simply don’t dare or know how to do it.

As Conservatives, we shouldn’t support this. It’s immoral and wrong. In any other walk of life, we wouldn’t let someone say “I’m going to start taking hundreds of pounds from your bank account unless you write to me within ten days to tell me I can’t”, but in energy it seems to be OK.

So the problems are real, and serious. But is a price cap the right answer?

Conservatives know that price caps are dangerous things. They’re fiendishly difficult to get right, distorting markets either by driving suppliers away if the price is set too low, or gouging customers if it’s too high.

So, how do we design an energy price cap which doesn’t accidentally magnify the problem we’re trying to solve?

Well, the Government wants the price to be set by an all-knowing committee of Ofgem regulators every six months. But the international price of energy moves around every day and, while I’m sure Ofgem is full of clever and well-intentioned people, any energy trader will tell you that it’s impossible to know what the price will be in the next six minutes, let alone six months.

What if Ofgem picks a number and, the next day, the wholesale price of energy falls hugely. What then? Well, switching customers in the ultra-competitive part of the market would find their prices would drop quickly, as energy firms reacted to the news.

But Ofgem’s capped prices for loyal non-switching customers on default tariffs wouldn’t move at all. So the cap would be ineffective at protecting customers and, because it’s officially blessed by Ofgem, would embed and legitimise high prices. And since the rip-off depends on the size of the mark-up between the competitive, switching deals and the default tariffs, things would get worse rather than better.

What’s the alternative? Well, since the rip-off is the size of the mark-up between the ultra-competitive switching deals and the uncompetitive default tariffs, why not just cap the mark-up instead?

That way, the cap will simply shadow the competitive, consumer-friendly part of the market, protecting loyal customers no matter what happens to the international price of energy.

Energy firms could still have as many tariffs as they wanted, so there’d be plenty of customer choice, and we’d have kept competition red hot instead of distorting the market.

The only justification for intervening should be to make energy look and feel like any other market where we expect the customer to be king (or queen) all the time. Where loyal customers pay the same price (or less) for their energy as customers who switch. Where there’s more competition and choice in every part of the market, rather than just the switching-deals part of it, so the Big Six have to work a lot harder to attract and keep our business than they do at the moment.

A cap which creates a maximum mark-up deals directly with the market’s underlying problem – the rip-off. The bill’s current proposal for an all-knowing committee of Ofgem regulators to fix the price every six months will do nothing to end the rip-off, will take longer to reform the market and will make it harder to get rid of the cap in the end.

As a proudly free-market party, we can do better. Many of the 40 or more challenger energy companies who are snapping at the Big 6’s heels agree, and have been clamouring for an intervention like the one I’m suggesting for some time. I think we should listen to them.

30 comments for: John Penrose: There’s a free market-friendly solution to energy price caps

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