How energy price caps make things worse - remember Harold Wilson and Ted Heath

And just last week the idea was endorsed by MPs on the cross-party Commons Business, Energy and Industrial Strategy Committee. Hardly surprising, since the committee is chaired by the Labour MP Rachel Reeves and a freeze on energy prices is a policy that the Tories stole from Labour in the first place. To many of us, a cap on energy prices would seem justifiable. Moreover, it is hard to avoid the conclusion that the Big Six energy suppliers have had it coming.

They have relied too long for their profits on the inertia of households on expensive standard variable tariffs, preferring to use these captive customer bases to subsidise the cost of attracting new customers with cheaper fixed-term, fixed-price deals.

And whenever you hear one of the Big Six bemoaning the lack of profitability of their domestic supply business, it is worth remembering that one of the reasons may be that they are paying top dollar for the electricity they buy from the same parent company’s generation arm.

That said, the justification for a price cap is based on some dubious maths and fuzzy thinking. The CMA’s calculation that households are suffering a £1.4 billion “price detriment” was based on comparing the cheapest tariff on the market with the average SVT and multiplying the difference by the number of households on the SVT. The “competitive price” for energy thus effectively became the lowest price. If every market was regulated and judged in this way, the country wouldn’t have any energy companies nor, in all probability, any supermarkets, car showrooms, pubs, petrol retailers and much else besides.

Nor would many energy businesses generate the profits to fund the £200 billion investment that will be needed in new energy infrastructure and generating capacity in the next two decades.

Competition in energy is not perfect but it is working. How else to explain the 20% decline in the Big Six’s share of customers since the market was liberalised?

If you want an example of a competitive market in action, then look no further than Centrica’s results this Thursday. The owner of British Gas, the nation’s biggest energy supplier, has already warned it will report a headline fall in customers of more than 800,000 and flat profits from its domestic supply business after raising prices in September.

The most effective way of ensuring consumers get a better and fairer deal is to encourage them to engage with the competitive market. Stung into action by the threat of a cap, several of the Big Six, led by British Gas, are giving this an extra push by scrapping SVTs altogether and introducing default fixed-term tariffs for those coming off more expensive deals.

The perverse effect of a price cap will be to encourage suppliers to price up to the cap, rather than compete to offer tariffs that beat the cap. We have already seen this with customers on pre-paid meters, where the introduction of a price cap has actually resulted in some prices going up, not down.

Small surprise, then, that May’s price cap has been criticised by former energy regulators such as Professor Stephen Littlechild. One wonders whether it is any more popular with the current incumbent at Ofgem, Dermot Nolan, whose job it will be to police the cap and presumably raise it when energy costs increase.

The MPs concluded their report by reassuring us they “favour a return to unbridled competition” once the price cap has done its job. In some respects, it already has.