Russell Lynch: Theresa May is playing with fire over energy price cap

Economics is always the first thing thrown out of the window when there’s an election around the corner. So it’s depressing but unsurprising to see the Conservatives unable to resist the temptation by promising to knock £100 a year off energy bills with a cap on the standard tariffs charged by suppliers.

Former Labour leader Ed Miliband’s 2013 energy price freeze for the “squeezed middle” was a stupid idea, and he was rightly pilloried for it.

The Tories have aped him this time around — dangling the electoral carrot to help the “just about managing” classes — and have gained a far more sympathetic reception, but that doesn’t make the idea any less flawed.

Let’s get down to basics first of all. Attempts at price controls have been around almost as long as money itself — and things usually go belly-up.

In ancient Rome, the emperor Diocletian attempted to tackle inflation with price controls but scrapped them after riots and bloodshed.

There was a maximum price on grain during the French Revolution, which caused chaos as farmers refused to supply markets and fed the black market instead. In New York, rent controls created a housing shortage, and a boom in illegal subletting.

You see the pattern here? Effectively removing the market signal that we need more buildings, grain, petrol etc simply intensifies the shortage.

But this is mere detail when there’s an election to be won, and clearly nothing is being left to chance despite Theresa May facing the most feeble opponent since 1983.

Conservatives have probably rightly calculated that there are few votes to be lost in kicking British Gas owner Centrica and their rivals over the next few weeks, while offering cheaper bills to some 17 million customers.

I’d be more worried for the longer term. Up to and including the new nuclear power station at Hinkley Point — and the last-minute delays to its approval — UK energy policy has been fumbling in the dark for years. We need more investment to help keep the lights on and these political games don’t exactly encourage the bigger companies to commit the billions needed. And when the shortages from that under-investment begin to bite the illusory nature of the promises will become clear.

Companies importing energy already face higher costs from the post-Brexit pound and they surely don’t require another reason not to invest. If standard tariffs are capped, the smart money says that increased costs will feed through to business customers, for example, who might cut their own spending as a result. It looks like the start of a vicious circle when the country is struggling to raise productivity.

And how dysfunctional is this energy market, anyway? According to regulator Ofgem’s latest assessment of the retail market, we’ve seen 14 new suppliers come into the market to challenge the “big six”, building market share to 14%.

By contrast, “the six large suppliers have continued to lose market share in both the domestic and non-domestic segments”.

Although results vary between companies, there also seems to be little evidence of the super-normal profits that might require a cap — indeed, “averaging across the large suppliers, profit margins on both domestic and non-domestic supply have fallen compared to the previous year”.

From this month, Ofgem has introduced a price cap for some four million more vulnerable pre-payment customers, where competition is less intense. That’s fair enough. But the economic damage of the same move for 17 million other customers looks too great when it might be more sensible to attempt to shake them out of their inertia.

Why not force companies to write to standard-tariff customers telling them in a clear way about better deals — and how to change supplier? If that doesn’t work, force firms to put customers on their cheapest deal.

I suspect more switchers will emerge this year as inflation rises. But the PM’s unwise election pledge could do more harm than good.