Tuesday 12 March 2019
Editorial – Price cap dominoes – a losing game for us all?
Today First Utility has announced it is raising its prices up to the level of the energy price cap. So what, you ask? Isn't it just following in the footsteps of the Big Six?
Yes it is and that's the exact point. Here is one of the so-called 'Challenger suppliers' following up in the wake of the big suppliers, in raising its price levels to what Ofgem has decreed. Is it a surprise? No. And I am sure all the smaller suppliers will follow in their footsteps, in simple terms if there is a price limit why wouldn't you charge up to that limit?
Let's look at another example of this, University Fees, with a son just coming up to graduation and facing an Everest of debt, it's something I know about. When the government raised tuition fees to a maximum of £9,250 it said this was the maximum and unis were free to charge up to that level.
Guess what? It wasn't just the Russell Group or Oxbridge who raised fees to the upper limit, they all did. Again it's simple economics, when you have the equivalent of an RRP you'd be brave to say you'll undercharge.
And this is my issue with the energy price cap. I think its folly in the biggest terms possible because it can't work.
You cannot regulate a price in what is supposed to be a free market, you can regulate standards and safety and all sorts of other things but NOT price.
If you want to do that, let's nationalise the energy sector as many in Labour would like, then we are done with it. Set price and we all pay to one universal supplier.
The concept of bringing fairer prices to all is a no brainer but I can't see how the price cap will do this? Look at it already in its short life, the cap has been raised because of the wholesale price pressures Ofgem had to recognise. Markets move up and down, that's because of competition and supply and demand pressures. They can only end if we suddenly have cheap or free homegrown energy - fusion anyone?
That isn't happening anytime soon and so we are in a situation where a market is being fixed to level that's allegedly a maximum but ends up being a minimum because why would you price yourself out of the game?
Switching is good and you can find decent deals but how does a business offer a deal? It has to work the internal market, by using the profits in one area of the company to fund a loss in another, in the hope that you get enough volume of sales to make it worthwhile. If all companies are tied to a standard price (which is effectively what the price cap means) how will they have the profit centres in which to fund better deals?
Competition is about the freedom to set the pricing you think the market will accept, or that you can sell at, otherwise it's a fixed game.
You can see with the number of small suppliers collapsing over the past year, the folly of entering a market when prices are low and expecting the market to stay stable. Tight margins get slaughtered when volatility comes to bear. I think so many smaller suppliers gambled on those tight margins when prices were low, so they could appear competitive against the Big Six. Now the market has rippled they have drowned.
How companies react to this volatility will be translated into the prices we pay and if you see another spike in wholesale prices, don't you think Ofgem will have no option but to listen to the market and raise the cap again?
It is a piece of legislation that was ill thought through and poorly executed by an organisation with some fundamental flaws.
I can say for sure there will be more instability in the markets before the ink has dried on whatever Brexit deal we have, this week, month or year. Our energy markets will be exposed to new pressures for some time to come.
In my view the price cap will only add to these pressures.
