Does the cap help or has it exacerbated the crisis?

pochase

ChaunceyGardiner said:

So, choosing not to engage with the system.  Difficult to set up a system to assist people who deliberately choose to want nothing to do with it.

If the majority of people want nothing to do with it, perhaps the system itself is flawed?

So we went from the landlord does not allow to switch, to the system is to complicate, to people don't want to switch because they don't like the system.

The system has catered for those people when that cap was implemented. Nobody was able to foresee a situation where a price limit was a bad thing, destroying completion and to possibility to switch suppliers. 
They were still losing out on the cheap deals and paying more than necessary, but that was their choice for not to have to deal with a system they did not like.

EssexHebridean

ChaunceyGardiner said:

michaels said:

The cap has helped make the UK energy market 'fairer', preventing those who are too lazy to shop around from being fleeced for their laziness.

That's rather unfair. Plenty of people are not in a position to switch, because their landlord won't allow it, or they have complex meters, or they don't understand the system, due to being elderly, or of low intelligence etc.

You were doing so well until your unpleasant and patronising choice of final words... 

macman said:

ChaunceyGardiner said:

michaels said:

The cap has helped make the UK energy market 'fairer', preventing those who are too lazy to shop around from being fleeced for their laziness.

That's rather unfair. Plenty of people are not in a position to switch, because their landlord won't allow it, or they have complex meters, or they don't understand the system, due to being elderly, or of low intelligence etc.

Your landlord cannot prevent you switching supplier. It's the choice of the bill payer.

A landlord can (and some less decent ones do) make it extremely clear that they'd prefer that a tenant doesn't though. 

EssexHebridean

michaels said:

ChaunceyGardiner said:

So, choosing not to engage with the system.  Difficult to set up a system to assist people who deliberately choose to want nothing to do with it.

If the majority of people want nothing to do with it, perhaps the system itself is flawed?

Lots of people don't bother to shop around for car insurance, mobile phone, broadband, groceries.  Should the govt provide all of these and set the prices?

The cap has broken the market, people have been disincentivised to fix and suppliers have been prevented from hedging beyond the next 3/6 months both of which have cost 10s or 100s of billions; all because people are too lazy to spend 5 minutes shopping around for a big expenditure item so the govt had to protect them.

What do you offer as an alternative, and how do you imagine it would alter the situation we find ourselves in currently, if we were to accept that your premise is correct? 

ChaunceyGardiner

michaels said:

Lots of people don't bother to shop around for car insurance, mobile phone, broadband, groceries.  Should the govt provide all of these and set the prices?

The cap has broken the market, people have been disincentivised to fix and suppliers have been prevented from hedging beyond the next 3/6 months both of which have cost 10s or 100s of billions; all because people are too lazy to spend 5 minutes shopping around for a big expenditure item so the govt had to protect them.

The energy market is especially confusing for people for some reason, as evidence by the widespread confusion regarding kWhs, what the cap figure actually means, etc. Plus, people worry about long delays in receiving credit balances when they switch supplier or if their supplier goes bust. Unlike the other goods and services you mention, gas and electricity are fungible. Does it really make sense to have different prices for an identical product with no substitute?

littleteapot

I remember the hysteria the media created which led to the price cap being introduced - lots of examples of the poor old granny paying over the odds to put the gas fire on or boil the kettle because the evil energy suppliers screwed her as she wasn't sure how to switch tariff or supplier, or indeed might not have even wanted to try.

Yet even without the internet one doesn't have to be fleeced. For several years now, suppliers have been mandated by ofgem to state on the bills (paper or otherwise) if one of their other tariffs would be lower cost for the customer. And the customer could simply phone the number clearly stated on the bill and asked to be switched. Admittedly it might not be as cheap as another supplier that they could switch to via the internet, but would certainly be a lot better than the SVR was before the cap.

So yes I agree with the OP. The cap broke the market in order to appease the vocal lobby groups that represent the people who don't want to or can't easily engage with the system.

I don't see the same level of apathy towards changing suppliers in any other industry - most people seem quite happy to change mortgage supplier, insurance company, supermarket as often as is needed to get the best price.

The price cap wouldn't have stopped prices going as high as they are now, and indeed the sham outfits selling fixed prices without hedging would have probably gone bust anyway. I suspect the price cap just expediated the inevitable result of substandard regulatory practice.

michaels

Without the cap prices would have been much higher last winter and this spring as it delays increases - sounds good but it also made fixes seem poor value.  Why fix at 6p/25p when the cap means you have at least 4 months at 4p/18p before the next increase?  See for example Martin Lewis advise to wait and see.

If people had faced the true costs last winter/this spring then many would have fixed as the fixes would then only have been a little more costly than the cap and thus any would not be facing the current crunch prices.  This would have been supported by suppliers buying all that energy ahead when prices were lower (next summer prices are currently 550p plus per therm, only 3 months ago they were less than 300p per therm. 

Who now regrets not fixing at those lower prices?  Blame the cap, if you had been paying the true prices earlier this year, you probably would have done.

BUFF

The cap worked for the conditions that it was designed for where the standard tariffs were often the dearest & most profitable for suppliers.
It was never envisaged (so did not address the scenario) that we would be in the position that we now are in & where it was certainly a factor in many suppliers going out of business as they were obliged to sell energy cheaper than they could buy it.

It imo certainly needs revisited & adjusted (more than they already have).

michaels

Why didn't suppliers also lock in longer term supply at those prices?  Well all their customers were on the cap so they had to make sure they hedged the cap by buying forward 3-6 months ahead and no longer.  They were forced to hedge the cap exactly to avoid the possibility of going bust if they had gambled on longer term forward purchases.

jj_43

michaels said:

The cap has helped make the UK energy market 'fairer', preventing those who are too lazy to shop around from being fleeced for their laziness.

However I think it may have added materially to the current crisis:

1) Supplier Hedging
Suppliers can not buy ahead a whole winter or longer when prices are relatively cheap as that puts them at risk that wholesale prices fall after they hedge and the cap comes in cheaper than they have bought at.  This means they pretty much need to hedge in exactly the same way the cap is set, each day they need to buy the amount of energy they will need to supply in 3/6 months times at the 3/6 month forward price.  For example we have recently seen a big run up in prices, had companies hedged the whole winter 2 months ago then it would have locked in about half the cost, yes it would have been costly had prices fallen instead of risen, but it would have given us certainty

2) Consumer Behaviour
The cap means consumer prices have lagged the increase in wholesale prices.  This has resulted in fixes always being priced higher than the current SVR which not surprisingly has resulted in most people deciding to risk it on future cap rather than fixing now and paying more for several months in the hope of then paying less.  Again, same effect, rather than people being on long fixes that would have protected them from the spike (with suppliers buying forward to hedge the risks) instead most are going to have to suffer the consequences.

So the cap succeeded in its stated aims but has completely screwed the UK energy market by making it impossible/unattractive to lock in the lower prices seen earlier this summer and thus cost us hundreds of billions.

related to 1) suppliers can still hedge for any period they choose and offer the hedge as a fixed price product. 2 months ago a supplier could offer a fixed price at the lower price than now, but it would have been higher than SVT.

Yes given the SVT and for risk management they will hedge in the same way as the cap is set. They could have a cheaper SVT if they are more cost effective.

You could view the SVT as a six monthly or now 3 monthly fix tracker product.

related to 2) suppliers to hedge in advanced, thats why SVT is so much cheaper than todays fixes, and is the product that allow us to lock in the lower prices seen earlier this year and last.

Now SVT is catching up to todays prices.

ChaunceyGardiner

You were doing so well until your unpleasant and patronising choice of final words... 

It wasn't intended as an insult.