An energy price cap that does not quite fit

28th September, 2013

Miliband has promised to pull the plug on a very bad thing

‘Ed Miliband defended his proposal to freeze energy prices … His vow to stand up to “powerful vested interests that hold our economy back” was accompanied by a promise to freeze bills for 20 months if he wins the next election.’, September 25

Gosh. Mr Miliband has declared war on the free market!

That’s an excitable way to put it. Prices have been capped before, and not so long ago. Energy companies used to be monopolies or near-monopolies, so regulators imposed price caps. Those caps no longer apply to retail energy, the theory being that the market is now competitive enough.

But this market still isn’t competitive.

It’s much more competitive than it was, and neither the level nor the trend in prices is that unusual compared with other EU countries. No doubt competition could be given a prod, but it’s hard to see how a freeze for a few months can be anything but a stunt.

It will keep prices down, though.

It may. Energy prices do bounce around a lot – and, while they have been rising on average for the past decade or so, they have at times fallen. A freeze might actually keep them high rather than low. But in a way that misses the point. Nobody denies that Mr Miliband, given all the tools of state power to play with, can make retail prices go up, down or any way he wants. The question is whether this would be worth the unpleasant side effects.

He is bringing a sledgehammer to crack a nut, you think.

I think he is bringing a sledgehammer to a nightclub: he’s decided he doesn’t like the atmosphere and he’s determined to change it. And he will – but not necessarily in a subtle or constructive fashion.

What exactly do you think is wrong with a freeze?

Let’s start by acknowledging that this is economically a sideshow. If he is lucky, Mr Miliband’s 20-month cap (why 20 months?) will delay a price rise of 10 per cent or so. Energy spending comprises 5 per cent of the basket of goods used to calculate the consumer price index. So Mr Miliband will, on an optimistic view, postpone (not prevent) a 0.5 per cent rise in CPI. That will help some people but is trivial compared with what he might do with the tax or benefit system.

But it’s still something – so what’s the downside?

The first downside is that it makes UK energy policy look capricious, confrontational and juvenile. That matters because this country urgently needs new electricity generating capacity. If suppliers don’t expect to get the revenue they need to cover their costs, they won’t invest. It’s alarmist to suggest that Mr Miliband will simply scare them away and the lights will go out, but it’s reasonable to expect that they will need more convincing in the wake of his little pep talk at the Labour party conference, which can be summarised simply as: “Your customers vote and you don’t, and I’ll never forget that.” He has achieved the remarkable feat of damaging the country before becoming prime minister; most party leaders wait until they win an election before they start screwing it up.

Mr Miliband isn’t really very scary. Is that the only problem?

He is also ignoring climate change. Reducing greenhouse gas emissions means conserving energy, and generating it using nuclear power and renewables, both of which are probably more uncertain and more expensive propositions than oil, gas and coal. Because of this, prices are rising as a matter of policy – policy that began under the last Labour government, in which Mr Miliband was, I seem to recall, the energy secretary.

High energy prices still cause hardship.

They do, to some people, and they can be helped through taxes and benefits. But we live in a world where climate change is a looming disaster and security of energy supply a serious concern, and where our use of energy remains wasteful. In this context, out of all the things that Mr Miliband could demand should be cheaper, why on earth choose energy?

You’re unimpressed.

Mr Miliband’s message is: “Energy price rises are bad. I will make the bad thing stop.” This shows all the political maturity of a 10-year-old – which does, admittedly, place him firmly in the mainstream of British politics. It’s almost as though he looked enviously at chancellor George Osborne’s Help to Buy policy and wondered if he could possibly find something as crude, populist and ill-advised as that. He has succeeded.

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