November 1, 2018

Is the energy price cap bad for consumers? Flipper's response

Many experts in the energy industry have come out in opposition to the government’s planned energy price cap, and we’re adding our voice to the mix.

Here at Flipper, we believe that healthy competition helps markets and companies flourish. This couldn’t be truer of the energy sector, where the broad variety of tariffs and rates available not only gives consumers a real choice; it also allows for competition between energy suppliers.

A government-regulated energy price cap has long been advised against by the Competition and Markets Authority (CMA) and Ofgem (the independent energy regulator). Price caps interfere with pricing and tip the playing field in favour of the bigger corporations, and at the end of it all it’s the customer who loses out. Here’s how it happens:

Introducing an energy price cap will ensure that prices within the sector stagnate

As fuel prices are always fluctuating on the international market, energy companies need the flexibility to charge based on how much fuel costs globally. A price cap will squeeze out smaller suppliers who can’t cope, and ensure that the bigger energy suppliers increase their monopoly on the industry.

With all energy companies offering the same maximum government-sanctioned rate for energy, smaller suppliers – who are often the sources of the most competitive deals on the market – won’t be able to compete. Fewer energy providers on the market means less choice for consumers.

A price cap will discourage consumers from finding a better deal for themselves

At the moment, a very small proportion of energy customers in the UK use price comparison websites or automated switching services to find a better deal and switch energy suppliers themselves. Most customers are quite happy to stay loyal to a familiar brand, even if that company isn’t offering the best deal. It’s through this loyalty that customers overpay on their energy bills to the tune of a massive £1.4 billion every year. Energy companies bump their prices up because they know they can get away with it: their customers will stay loyal.

With an energy price cap, we suspect the problem will get worse. With customers believing that a government-sanctioned price cap will ensure they’re not overpaying, energy companies can still use misleading teaser rates to hook in new customers, and unfair Standard Variable Tariffs (SVTs) to overcharge their most loyal customers. If people think there’s no need to switch energy companies, because they all have the same rates, they won’t bother, and could end up overpaying.

Steve Smith, Director of Flipper and former board member of the energy regulator Ofgem, says: “If there’s a price cap, the energy ‘market’ is really no longer a market.

“Customers who would otherwise shop around will be lulled into a false sense of security, under the impression that the government is looking after them, and the variety of rates and tariffs available on the market will be reduced. It will become more difficult for suppliers to offer competitive rates.”

The energy price cap will not only reduce the variety of deals available to consumers; it will also discourage people from shopping around energy suppliers in the first place, leaving customers worse off than they were before.

Don’t get caught out. Switching energy suppliers regularly to ensure you’re on the best deal can save you a small fortune on your energy bills. If you haven’t got the time or inclination to do it yourself, trust Flipper to do it for you.

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