Economist Response, Guest Post
by Lisa Waters
In the latest of our series of guest blogs, economist Lisa Waters of Waters Wye Associates explains why in reality Ed Miliband’s energy price freeze isn’t really as good as it sounds.
Freezing energy prices for 20 months made great headlines at the Labour Party conference, but is it really good for customers? Definitely not!
The policy risks a whole range of unintended consequences:
- Set the cap too low and energy businesses will go out of business and certainly will not compete to get new customers.
- Set the cap too high and prices will approach the cap fast as suppliers look to make money while they can in case the cap comes down later.
- Either way, how you set the cap must take account of all the parts of an energy bill that suppliers have little, if any control over.
Energy companies must buy wholesale energy, which can be largely driven by the wholesale markets of fuels across the world. The GB electricity price moves with the UK gas price, which moves with EU gas prices, which are influenced by global gas prices. No politician can control that chain. Add to that the costs of the wires and pipes that deliver energy to our homes and businesses. Energy regulator Ofgem sets the prices for the transport networks. While they could reduce those costs, they are in fact rising, mainly as a result of increasing volumes of wind generation that costs a lot to connect, as it is not near the customers.
The part of the bill the politicians can influence is the part that is made up of taxes and policies.
The list of green policies (support for renewables, carbon price support tax, climate change levy, etc.) that are added to bills is substantial and increasing.
Labour could take these taxes off bills and instead finance some energy policy via general taxation. However, it would then need to be more up front with voters about raising that money – you cannot blame the energy industry for income tax!
Labour also talked about breaking up companies to try and create a competitive market. That is a more sensible way to get competitively priced energy, though it may not be cheaper.
However, a capacity crunch is due to arise around the time Labour could come to power.
The big integrated suppliers are going to be coaxed with new policies to build new power plants to keep the lights on. Threatening to break them up and their freeze the prices they can charge is hardly the encouragement they will have been looking for.
What Labour may have done is give themselves a really big headache trying to get power stations built when all they wanted to do was protect customers.
Customers value secure supplies, and totally reasonably would also like prices to come down. However, the easiest way for any Government to reduce energy costs is to stop playing politics and piling taxes and policies onto energy bills.