The Energy Cap

A policy intended to protect consumers is actually causing deep harm.

There is an interesting if mildly obscure branch of economics and political science that focuses on the role of ‘regulation’ in the economy. Much of this is about the phenomenon known as “regulatory capture” which, in blunt terms, is where the regulator stops working for the consumer and instead starts working for the people they are supposed to regulate. 

Modern Britain has real world examples of this in abundance: Ofwat and sewage discharges; the FSA and “debanking” are but two. None however, compare to the egregious failure of public policy that is OfGem and the energy price cap, which can be otherwise described as a monstrous transfer of wealth from consumers to the energy companies.

On 25th August, OfGem – the Office of Gas and Electricity Markets – published the price cap details for the period Oct-Dec 2023. The good news is average bills should fall by about 7%. A cause for celebration one might think.

Look closer however and the picture is much darker. The wholesale cost element (cost of fuel) in the price cap has come down by some 10% but the wholesale price of gas has fallen by 75% since this time last year.  Why the disparity? It is impossible to figure this out from OfGem’s calculations.

It gets worse. Gas ‘only’ provides on average, across the year, about 40% of our total energy, but we still price the cost of renewably generated power – Nuclear, Wind, Solar – from the wholesale gas price despite the much lower operating cost of renewables. For example, Nuclear costs about 5p per unit in operating costs compared with a retail cost to us, the consumer, of 27p per unit from October 1st.

And worse still, OfGem has increased the profit allowance within the formula by £10 per consumer to help companies stay in business – in effect, subsidising the incompetent and inefficient whilst over-rewarding the competent, all at the expense of you the consumer.

The price cap was brought in by the May government but its methodology and calculation is entirely unsuited to energy price volatility and has served as an engine of wealth transfer from the consumer to energy companies, many of whom ’game’ the system at times of demand stress to increase their profits. The price cap has become a price floor, destroying competition and harming the consumer. Soviet style incompetence and central planning under a Conservative government.

There is no better example that exemplifies the crisis in modern conservatism and the Conservative government. They bring in a policy to protect consumers that actually causes deep harm and then have neither the competence or administrative ability to recognise it or do something about it.

So if you’re wondering where to aim your disapprobation, now you know. This particular sacred cow deserves to be shot.

Leave a Reply

Your email address will not be published. Required fields are marked *