Government plan withdrawal touted ‘dramatic change in energy policy’

An academic has told ELN that extending the EPG for two years would have exacerbated “unsustainable” strategies of least-hedged energy firms

Big Zero Report 2022

The government’s announcement to make the Energy Price Guarantee a short-term measure to help households with rising energy bills might bring more changes in the UK energy policy.

Jacopo Torriti, Professor of Energy Economics and Policy at the University of Reading, told ELN: “This is a dramatic change in energy policy. The surge in energy prices exposed a retail market that has not been working in the interests of all consumers.

“The introduction of the price cap under Theresa May’s government did not help. There is now evidence that the structure of the price cap subjected consumers to considerable risks by exacerbating both the risk of and cost of supplier failure.”

Professor Torriti explained that whilst the price cap “did not significantly close” the £200-300 gap between the cheapest tariffs and default rates until mid-2021, it did lower profits equivalent to £55 per customer on pre-crisis bills.

He added: “The introduction of the price guarantee for two years potentially exacerbated the incentive for lightly capitalised suppliers pursuing unsustainable strategies, generally offering poor customer service and no innovation.”

A few days ago, it was reported that officials were looking at various energy market reforms, including scrapping the energy price cap after the end of the Energy Price Guarantee. 

Professor Torriti said with the Energy Price Guarantee, the risk associated with high wholesale energy prices was removed from suppliers and socialised through government spending.

He explained: “The reduction of the duration of the scheme from two years to six months will have positive implications for these market dynamics and, of course, will reduce government spending on energy with the opportunity to invest in the innovation a 21st-century market needs.

“The retail market is expected to change through the 2020s, with the growth of flexible tariffs, digital transformation, the integration of transport and heat with electricity and more investment in domestic decarbonisation.

“This will dilute the current market focus on price, incentivise longer-term relationships with customers and generate opportunities for new business models, products and services for consumers.

“Most importantly, for households after April 2023, a targeted approach to reducing tariffs will hopefully mean higher levels of support to those who need it.”

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