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The Research Brief: the free market case against the energy price cap

Your weekly dose of policy thinking.

By Spotlight

Welcome to the Research Brief, where Spotlight, the New Statesman’s policy section, brings you the pick of recent publications from the think tank, charity and NGO world. To see more editions of the Research Brief click here.

What are we talking about this week? “The Case Against the Energy Price Cap”, the latest policy paper from the Centre for Policy Studies.

Centre for what? Centre for Policy Studies (CPS). That’s a very influential, centre-right, free-market think tank in Tory circles, set up in 1974 by Keith Joseph (the man who inspired a schoolboy named Nigel Farage to join the Conservative Party), Alfred Sherman (a communist-turned-Tory) and one Margaret Thatcher (former prime minister and—

I know who Thatcher is. Right. Well, for her, the Centre for Policy Studies was a platform for getting radical free-market ideas into the Conservative mainstream. The CPS is currently headed by Robert Colvile, one of the authors of the 2019 Conservative manifesto – so when the CPS speaks, it’s fair to say the party listens.

Got it. So, what’s the policy paper saying? That we need to get rid of the energy price cap (EPC). When the then leader of the Labour Party Ed Miliband proposed a price freeze in 2013 he was accused by David Cameron of living in a “Marxist universe”. This was only four years before a very similar-looking policy was adopted and implemented by Theresa May

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So this is a conservative think tank criticising a Conservative policy? Yes, but things have got a lot more complicated since the halcyon days of 2017. Wholesale energy costs went through the roof as the world came out of lockdown in 2021 and demand surged. That was exacerbated by the world’s largest energy exporter, Russia, invading Ukraine in 2022, and the West deciding to wean itself off Russian imports in response. As the average household bill was projected to reach eye-watering levels without any intervention, the EPC was made redundant. Suppliers couldn’t supply energy at the cap price, as they would be losing a lot of money. And so the government was forced to provide the energy price guarantee, effectively subsidising the unit cost of energy to the tune of many tens of billions of pounds. Average household energy bills would be no higher than £2,500 a year – still a big increase on previous years.

Last month, this subsidy scheme ended, and the EPC came back into play because wholesale prices had gone down enough for it to be set below £2,500. But, says the CPS, the price cap has now effectively become a “state price control” that is “actively harming competition” and “leading to higher prices for consumers”. As wholesale world-market energy prices begin to fall, we should be seeing this reflected in consumer costs, but the price cap is keeping them stubbornly high.

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Wait, isn’t the price control keeping the cost lower? That’s what those pesky Marxists may think. More or less all energy suppliers are now only offering prices at the capped level, or very, very slightly below the cap. This has destroyed competition and switching suppliers has fallen off a cliff. After all, why switch when everywhere charges the same? An obscure but important instrument called the market stabilisation charge is being used by the energy regulator, Ofgem, to avoid supplier insolvencies and market volatility. But, the regulator admits, it does deter competition, which the CPS says would drive prices downwards in a restored free market as global energy costs come down.

Should we just implement a free market for all? Kind of. The CPS wants to remove the cap, restore competition, but also retain and strengthen social tariffs for lower income and vulnerable customers.

Understood. So when can we get rid of this communist cap and spend less money on the heating? Not so fast. Not everyone is convinced. Josh Emden, a senior research fellow at the Institute for Public Policy Research think tank, pointed out to Spotlight that “wholesale energy prices are coming down, but they are still significantly higher than before the invasion of Ukraine”.

Oh. Exactly. He said that “the energy price cap is still doing work in holding back the floods, even though the rains may have eased off”. The CPS admits that competition did exist under the May-era EPC before the post-invasion energy crisis. Multiple companies offered different tariffs below the Ofgem-mandated maximum. The thing that’s stopping a return to that isn’t a lack of competition or the price cap, it’s the fact that world market prices still remain incredibly high. “I think there is a really big risk that if you just said remove the price cap now,” Emden added, “what you would see is suppliers charging a significant amount more.” Competition would be restored, bills would be more varied between different providers offering different tariffs, but they’d still be varied significantly above the current cap.

We’re doomed to high bills for a while, then? Probably, yes. Although it will be interesting to see if even this most influential of Conservative think tanks is quite influential enough for a hard-to-sell-to-the-voters policy like “abolishing the energy price cap” to make it into the next Conservative manifesto.

In a sentence? When it comes to energy provision, free markets and competition = good; government-mandated price controls and interventions = bad.

Read the full report from the Centre for Policy Studies here.

If you have a report, briefing paper or a piece of research that you’d like featured in the Research Brief, get in touch at