Price caps

Faced with this emergency, the government has been forced to act. Until April 2023, when the policy
will be adjusted, the price that households pay for each unit of gas and electricity will be fixed,
limiting the typical households’ energy bill to £2,500 a year. While this is still double the price that
households were paying before the crisis, it is less than half what bills are forecast to rise to without
government action.
The government can control the price that suppliers charge households, but not the price suppliers pay
to generators and extractors — particularly given that about half of the gas used in the UK is imported
from overseas.
when the government caps the cost of energy, what it is actually doing is paying energy suppliers the
difference between the price they have to pay to buy electricity and gas from generators and extractors
and the price they are allowed to charge to their customers. That is an expensive business. Under
current forecasts, this winter the price cap will effectively mean the government is spending 75p for
every £1 that households spend on energy.

The second problem that a price cap raises is a subtler one. Prices, it turns out, are rather useful things.
The high price of gas is a signal from the market that there isn’t enough of it to go around. As it
becomes more expensive, gas is effectively rationed with consumers choosing to consume less of it as
the price rises.
With the supply of gas reduced, somebody has to use less, and higher prices can play a role in
ensuring those who value energy the least reduce their consumption. By capping prices, the
government has blunted the incentive for households who can afford it to turn down their heating by a
few degrees over the winter — effectively meaning the country will end up buying more energy that it
needs to.