Theresa May faces backlash over plans for ‘absolute’ price cap on energy bills

Theresa May is facing a backlash from senior Conservatives over her plans for a price cap on energy bills.

Almost 20 Tory MPs, including three former cabinet ministers, have warned that her proposals for an “absolute” cap on bills will reduce competition between firms and “distort” the energy market.

In a formal submission on the Government’s draft Energy Price Cap Bill, the backbenchers, including Oliver Letwin, David Cameron’s former policy chief, and Caroline Spelman, the former environment secretary, say that the measure will lead to prices simply being raised to meet the new limit.

Instead, the MPs call on Mrs May to introduce a “relative” cap, which has found more favour with MPs ideologically opposed to interventions in free markets.

Unlike an absolute cap, which would set an overall maximum price, a relative cap would set a maximum mark-up between each energy firm’s best deal and the standard variable tariff paid by most customers.

John Penrose, a former constitution minister, who had campaigned for a price cap, said that a “relative” limit was a “Conservative answer” to the problem of “rip-off prices” – while an absolute cap “would cut customer choice and competition”.

The announcement of a new bill introducing an energy price cap was one of the centrepieces of Mrs May’s speech to the Conservative Party’s conference in October and was seen as a key element of plans to win back disaffected voters.

The intervention by Mrs May’s MPs, who were joined by senior figures from Labour and the Scottish National Party, will put pressure on the Government to overhaul the current proposals before a final version of the bill is submitted to the Commons in the coming weeks.

The disclosure of the submission, to the business and energy committee, comes ahead of an appearance in front of the committee by Margot James, the minister for consumers, on Wednesday, when the criticisms are likely to be raised with her by MPs, who are scrutinising the draft legislation.

It was led by Mr Penrose and signed by 19 Tory MPs, in addition to Patricia Gibson, the SNP’s consumer affairs spokesman, Ben Bradshaw the former Labour cabinet minister, and Caroline Lucas, the leader of the Green Party. It was also signed by eight “challenger” energy firms.

The document states that a cap is necessary because the market is failing to “work in favour of consumer”.

But it adds:”The draft bill proposes an absolute price cap, where regulators meet every six months and pick a number.

“It will reduce competition because supplier prices will cluster around a single number rather than pricing off each one’s best competitive deal. Suppliers will sit at the ‘regulatory’ level with little incentive to become more efficient.

“It will [also] be more vulnerable to politics and lobbying, because it is set by regulators rather than customers. And the Big Six have far bigger teams of lobbyists than the challengers.”

The MPs add: “It’s a highly distorting approach which replaces daily market-derived prices with infrequent regulator-derived ones, which throttles competition by being far less good at discovering and then meeting consumer needs.

“The capped prices will be out of date as soon as wholesale gas prices change.”

By contrast, a relative cap would “protect customers” who fail to switch to cheaper tariffs while still leaving “a worthwhile incentive for those that do.”

“It restores the link between the prices which companies advertise in the marketplace and those which they charge the majority of their customers, incentivising efficiency and restoring competitiveness to the market for ‘back book’ customers,” the submission to the business committee states.

This weekend a a spokesman for the business and energy department insisted that an absolute cap set by Ofgem “is the best way to protect all consumers and ensure the cap is not gamed.”

“A relative cap may simply prompt the withdrawal of more competitive rates by larger companies while offering no protection to people on poorer value tariffs,” the spokesman said.

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