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19 October 2012

After the energy shambles, Cameron needs to restore certainty

The timing of this week’s confusion could not have been worse.

By Reg Platt

The last three days have seen government policy on energy tariffs and decarbonisation in flux. Conflicting statements from the Prime Minister, the Energy Secretary and the new energy minister have caused confusion. While an announcement from Ofgem today has helped provide clarity, confidence in the government has already been undermined. With a group of major energy companies already threatening to withdraw hundreds of millions of pounds of planned new investment in the UK due to policy uncertainty, this week’s events will only make matters worse.

At Prime Minster’s Questions on Wednesday, Cameron said, “I can announce that we will be legislating so that energy companies have to give the lowest tariff to their customers”. The sector was shocked and confused. Not only would this be incredibly difficult to implement, it would also mark the single greatest act of intervention in the energy retail market since liberalisation – not the type of light touch regulation to be expected from a Conservative Prime Minister.

Today, thanks to the release of Ofgem’s Retail Market Review, it has become clear what the Prime Minister should have said. He should have announced that suppliers will be required to tell customers if there is a cheaper tariff, rather than automatically putting customers on the cheapest tariff.

One of Ofgem’s better proposals in the review is for suppliers to only be able to offer four tariffs for each fuel type. This policy was recommended by IPPR in our recent investigation of the retail energy market. This reform will simplify the market and encourage people to switch thereby improving competition, which will help keep bills low.

It should also help to ensure that tariffs are reflective of suppliers’ costs — a major problem since ‘loss leading’ tariffs act as a barrier for new suppliers to enter in to the market and vulnerable and low income people who don’t switch regularly can often be overcharged.

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The timing of this week’s confusion could not have been worse. It is only three weeks since Ofgem announced that the spare electricity generation capacity in Britain will fall to a critically low level in 2015/16, raising the prospect of blackouts. With Twitter quick to dub this episode a “combishambles“, the government needs to restore certainty and predictably before they publish their upcoming Energy Bill.

Reg Platt is Research Fellow at IPPR. He tweets as @regplatt.