So much for price-fixing. The energy price cap is finally set to fall, with the result that the average household should have to pay no more than £2,074 a year for its energy from 1 July.

The price cap itself has fallen from £3,280, but bills were in practice limited by the government’s other great intervention in the energy market: the energy price guarantee. This was, in effect, a cap on the price cap which limited prices at a level where the average household paid no more than £2,500 a year. As a result, household bills will fall from an average of £2,500 to £2,074 – a drop of £426.

The energy price cap has helped deflect attention from a very deep problem in the wholesale electricity market

The fall will come as a relief to the Treasury and anyone else concerned by levels of public spending and borrowing. It means that from 1 July the energy price guarantee will no longer be costing taxpayers anything.

When introduced in Liz Truss’ brief premiership it was feared that the open-ended commitment to subsidise people’s energy bills could end up costing the taxpayer over £100 billion. The latest estimate produced by the House of Commons Library in April puts the cost at £27 billion – still a huge sum but a lot less that was feared even at the beginning of the year.

But apart from a large tax bill, what have the government’s efforts at price fixing in the energy market actually achieved for consumers? It is remarkable that, even after the drop in the energy price cap, households will still be paying twice as much for their energy as they were in March 2022. Yet wholesale gas prices have plunged from last summer’s spike and are lower now than they were in March 2022. So why will we still paying twice as much for our energy even after the drop in the cap?

Our privatised energy market might pose as a free market but in practice it is anything but. Indeed, the presence of the energy price cap has helped deflect attention from a very deep problem in the wholesale electricity market, which has hugely driven up costs.

Under the rules of the market devised after privatisation, electricity generators are all paid the same price at the same time, no matter how much it is costing them to supply electricity. This price is set by the price charged by the most expensive producer – a system called marginal cost pricing.

In other words, say Britain is using 40 GW of power at a particular moment, generated by a mixture of gas, solar, wind, nuclear, energy storage and electricity imported from France, Belgium and elsewhere. All those producers will be paid the rate charged by the most expensive source of energy. What might have made sense in the 1990s when the overwhelming majority of our power was provided by coal and gas plants has had perverse results when applied to an electricity grid which has to cope with large quantities of power provided by intermittent solar and wind.

What happens over and over again is that solar and wind fall short and the market has to scrabble around for extra power at short notice. This might either come from gas ‘peaking’ plants, switched on at short notice, battery storage or electricity imports. Inevitably this is extremely expensive – the owners of a gas peaking plant, for example, has to charge enough to cover the long days and hours when their plant will be standing idle. Yet under the rules of Marginal Cost Pricing, everyone providing power at that moment will be paid the same elevated price.

It is a system which guarantees consumers will be paying more than they should do. Yet, rather than reform the market, the government has chosen to intervene to protect consumers at one end – while imposing windfall taxes on generators’ profits at the other end. In other words, price-fixing is being used to disguise the workings of a very faulty market which is elevating electricity prices far higher than they need be.