Capping competition


This report by UK think tank Adam Smith Institute looks at the UK energy market.

This new report looks at dangers to the energy market by government intervention, and just what the Government should do to encourage competition. Big 6 energy suppliers should be invited to sell off 10% of their customer base to allow a new entrant to enter the market and boost competition for consumers; this would follow a proposal by Professor Stephen Littlechild that suppliers should be forced to sell customer bases as National Power and Powergen were as power generators. Price differences between ‘rip off’ Standard Variable Tariffs (SVTs) and cheaper fixed tariffs are not evidence of low levels of competition. In fact, large price differences between similar products are frequently observed in highly competitive markets. International evidence suggests that price caps reduce rates of customer engagement (measured by switching), lead to higher average costs, and result in inefficient pricing arrangements. Reduced customer engagement will reduce the prospects of innovation within the energy market in the medium-to-long term to the detriment of consumers. Price controls would threaten an environment of permissionless innovation where suppliers can offer new pricing models without asking for regulatory approval. Dynamic pricing models could accelerate the roll-out of low-carbon renewables and home batteries, but such models rely on peak-time surge pricing. Relative price caps will also likely lead to reduced customer engagement, lesser competition in the fixed rate market and higher mark-ups on SVTs, with profits flowing to suppliers and not savings to consumers. Evidence from Australia suggests that caps harm competition and lead to worse long-run deals for consumers. In 2012 when Queensland’s politics forced a lowering of the price cap just over 45% were on the standing offer, and 40% on medium-level discounts; by 2015 the number accessing discounts had halved with proportion on standard level at the same amount. In contrast, deregulated Victoria saw the proportion on standing offers almost halve over the same period as the proportion accessing high-level discounts increased rapidly. There are a number of alternative measures that would cut costs for vulnerable customers without reducing customer engagement and stifling innovation. These include opt-out collective switches and allowing competitors to target disengaged customers with direct marketing.

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