Exploring the implications of energy price caps
The UK retail energy market has witnessed multiple regulatory interventions since it was liberalised almost two decades ago. A new study led by Queen Mary University of London explores the ongoing political, legal and policy debates of energy price caps.
Interventions in the regulation of the UK’s energy sector reached their peak in July 2018 with the enactment of the UK Domestic Gas Electricity (Tariff Cap) Act. The Act puts in place a requirement on the independent regulator, the Office of Gas and Electricity Markets (Ofgem), to set an absolute price cap on poor value tariffs.
According to a new study led by Dr Maria Ioannidou from Queen Mary’s School of Law, these latest developments signal a rejection of the main model of consumer empowerment that has informed regulatory remedies to date.
Very few sectors have witnessed such heated political debates in recent years as the UK liberalised retail energy market, with the main political parties in the UK making reference to the sector in recent election manifestos.
Control versus competition
Published in Modern Law Review, the research, which was also co-authored by Dr Despoina Mantzari from University College London, highlights the difficulties in reconciling price caps with the competitive process and consumer empowerment.
The authors argue that the return to price cap regulation in the UK retail energy market reflects an acknowledgement of the failure of neoclassical economics, and of the competition paradigm in the UK energy market.
The research also exposes the difficulties of re-regulating an area that was once de-regulated. Consumer choice was emphasised throughout the process of de-regulation whilst the latest developments herald a new era of re-regulating the retail energy market by resorting to consumer protection measures.
“The argument is not that price caps are undesirable per se. The aim here is rather to criticise their suitability and effectiveness in addressing consumer disengagement with the market,” said Dr Maria Ioannidou, Lecturer in Competition Law at Queen Mary's Centre for Commercial Law Studies.
The research also suggests that contrary to what many think, price caps do not necessarily mean that consumers are more empowered. “Regulated prices impede the development of retail competition and can prevent market entry from new suppliers thus reducing consumer choice.
“Furthermore, artificially low retail prices prompt consumers to disengage from the market, and negatively impact the consumers’ propensity to switch providers,” explained Dr Ioannidou.
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