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Between a Rock and a Hard Place? Price Caps and Flexibility

Given the increasing complexity of the energy system, it is important that the significant advantages of flexibility enabled by cost-reflective tariffs are not ignored in the short-term by attempts to reduce consumer bills.

Energy prices have been in the eye of the storm for some time in the UK. The weeks before the June 2017 general election saw both main parties promising retail price caps to consumers. This alarmed several analysts and economists in particular as the introduction of caps could stifle competition and innovation, and reduce opportunities for new entrants in the market. Others took this opportunity to emphasise the several failures of the liberalisation of energy markets in the UK. However, it is important that any measures to reform retail pricing and address potential consumer detriment are compatible with the broader context of the current constraints and future aspirations of the electricity system. For example, the desire to keep retail prices down for vulnerable consumers must be balanced against the need to manage the impact of intermittent supply and fluctuating demand on the efficient operation of the energy system. Forthcoming research on Distributional Effects of Dynamic Pricing for Responsive Electricity Demand (DEePRED) looks to inform these considerations.
 
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