Energy price caps ‘could prompt steep bill hikes’
Caps on energy prices could lead to “steep” hikes in bills, a think tank warns.
The Institute of Economic Affairs (IEA) says speculation that the current government may look to control gas and electricity prices would deter investment in the sector and likely lead to supply shortages.
It adds capping prices would reduce competition among energy companies and the anticipation could prompt increases before it is introduced.
Its new report urges the government to harness the opportunity provided by Brexit to simplify energy policy and cut household bills.
The IEA states once the UK leaves the EU, it will no longer be subject to the range of subsidies, quotas and targets set by the European Commission.
It adds the EU-mandated 5% reduced VAT on fuel bills and winter pensioner payments, which “subsidises reach and poor alike” should be scrapped.
It suggests the government should instead provide cash subsidies in the form of electricity vouchers to the lowest income homes, especially targeting vulnerable people.
The report also states phasing out existing crude interventions, such as the Climate Change Levy, Energy Company Obligations and renewable subsidies in favour of a cap-and-trade scheme would reduce industrial energy bills significantly.
Diego Zuluaga, Financial Services Research Fellow at the IEA said: “The UK’s interventionist energy policies have caused prices to rise by over 50% for households and businesses over the last 15 years. Interventions aimed at reducing greenhouse gases have been particularly costly. It doesn’t have to be this way: in the 1990s, electricity charges fell by over 25% even as Britain cut its carbon footprint.
“Leaving the EU will remove Britain from the European Emissions Trading System as well as the 20-20-20 targets for renewable energy generation. The government can replace these policies with domestically generated and more economically efficient alternatives such as a system of pollution permits which cuts emissions in the most affordable way.”
The Committee on Climate Change recently said improved energy efficiency in the UK has helped offset low carbon policy costs on energy bills by £290 a year and reduced emissions.