Prime Minister’s populist pledge to cap energy bills will be bad news for those who seek out the cheapest deals.
Prime Minister Theresa May yesterday (October 4) announced that a price cap on households energy bills is to go ahead after all.
The idea was first floated in the Conservative's election manifesto back in May but, when no mention of it was made in the Queen's speech a month later, most of us assumed the idea had been consigned to the scrap head.
While the specifics of how this cap will work will only be revealed next week, the prime minister has pledged that millions of households will save up to £100 a year as a result.
A populist announcement
You can easily see why such a move would be popular.
Energy prices keep rising, and numerous studies show it’s the elderly and low-income households who are hit with the highest rates.
By limiting the maximum amount the energy giants can charge, you automatically ensure millions will avoid being “ripped off”.
The flipside to this argument is that price caps of any form tend to push up average prices.
By limiting the amount someone can charge for something, you reduce the amount that person wishes to supply.
Likewise, there are fears that a price cap will reduce competition and investment into the sector overall.
However, the purpose of this article isn’t to convince you one way or another whether a price cap is a good idea (as some people clearly believe).
It’s to highlight how we think a price cap might impact on your pockets.
Cheapest deals could disappear
The main concern for the Government is that too few people are switching from pricey standard tariffs.
Its own data claims people would save £200 a year by doing so.
If the Government decides people aren’t going to switch themselves, then it wants to bring down energy costs for them.
But if you dramatically reduce the costs for millions (and again, that’s up to you to decide if a cap will achieve this) then logically it means costs have to rise elsewhere.
The most likely area is at the sharp end, where energy suppliers compete for the custom of engaged, regular switchers – like loveMONEY readers.
Our data shows half of you have switched in the last year and two thirds plan to switch in the next 12 months.
Most have not been on a standard tariff for some time. So not only would a cap on these deals not benefit those who have switched, but it will be to your detriment if the cheapest deals start disappearing from the market.
What should you do?
As we mentioned right at the start, we don’t really know how this price cap will work. Details are thin on the ground at this point, so it’s hard to say exactly what the impact will be.
If you are worried the best deals will disappear, you could consider locking into a fixed or capped tariff today.
We have our own price comparison service, which will allow you to check a number of deals in your area to find the cheapest for you.
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