The UK’s energy price cap has gone “far beyond its intended purpose” and is now preventing customers from accessing lower-cost deals for electricity and gas, according to the Centre for Policy Studies (CPS).

In a report published today the centre-right think tank says the evolution of the price cap to a “de facto regulated market price” is driving inflation by discouraging competition among retail energy suppliers. The CPS is calling for the abolition of the price cap in its current form, which now covers almost the entire UK market at 29 million households.

Introduced in January 2019, the energy price cap sets the legal maximum that energy suppliers can charge per unit of gas and electricity, as well as the maximum on “standing charges” for being connected to the supply system. It covers customers on standard or default tariffs, but not those on a fixed-rate contract.

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The cap is reviewed every three months by industry regulator Ofgem, whose objective is to ensure that suppliers can recoup their costs and make a limited amount of profit while also making sure customers do not pay more than they should. The price cap for the typical dual fuel household paying by direct debit is currently £2,074 per year, with Ofgem due to announce its next price cap covering the three months from the beginning of October on August 25.

The author of today’s report, “The Case Against the Energy Price Cap”, says the energy crisis and political and regulatory distortions have “dragged it away from its original purpose” as a time-limited intervention to protect a specific group of customers from price-gouging. The result is that competition in the market has “been essentially frozen” by policies that disincentivise firms from trying to attract new customers.

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“Utility firms are being actively discouraged from offering new, more affordable deals to customers because of state interventions in the energy market,” said Dillon Smith, CPS energy and environment researcher.

“Competition has all but disappeared, meaning prices are being kept high, further contributing to measured inflation. Government needs to rethink the price cap, and deliver choice and competition for consumers.”

The group is calling for a return to “a retail market with competition at its heart”, but also wants the introduction of stronger protections against fuel poverty such as social tariff for households spending an excessive proportion of their incomes on fuel bills.

Other recommendations include tackling the “loyalty penalty” for those on default tariffs by, for example, banning acquisition-only tariffs. Government must also focus on building “a resilient energy market for the long-term” the encourages innovation and supports net-zero ambitions.

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Dr Craig Lowrey, principal consultant at energy market intelligence group Cornwall Insight, said households are still facing bills well above historic levels despite recent reductions in the price cap. This raises “questions about the cap’s purpose, its efficacy in safeguarding consumers, and its impact on tariff competition”.

“In light of this, it becomes crucial to explore alternative measures that can better protect consumers, promote fair competition, and ensure affordable and transparent energy pricing for all,” he added. “The exploration of options such as social tariffs, energy efficiency initiatives, and various other avenues should be prioritised.

“Any reductions to the price cap should not diminish the sense of urgency in implementing necessary changes. The protection of vulnerable households from high energy bills remains a pressing issue that requires immediate attention.”

Responding to the report, a spokesperson for the Department for Energy Security and Net Zero said: “The government will always ensure that the energy market is working for consumers to protect them from sky-high bills and that households are getting the best deal.

“We welcome this report as part of our ongoing consultation on putting in place regulations to ensure people can access the full benefits of moving to a smarter, more flexible energy system.”