Thursday, 26 September 2013

Is Ed Miliband right on freezing energy prices?

Is Ed Miliband right to challenge the energy industry on pricing? It is a populist move. At a stroke he has outflanked Cameron on an issue the prime minister once had a go at when he questioned the complexity of tariff choices. But is a price freeze a sustainable policy?

It hasn't taken five minutes before energy company bosses were parading in the media with doomsday scenarios. The lights would go out if a Labour government freezes energy prices for two years.

It is of course a load of piffle. The lights will not go out. Not, that is, if there is sufficient investment in energy production. The energy industry will argue that it is supply and demand operating in the market for energy that should and does determine prices.

The truth is that energy markets are complex. Supply depends on the capacities of power plants, their current technical state and planned refurbishment, or on supplies from abroad. On the demand side the weather  plays an important role. Temperature and cloud cover influence consumer behaviour directly. Severe winters add to demand.  It is also affected by changes in the state of the economy and industrial output. Instability in the Middle East is a major factor on world energy markets. Other factors include consumer behaviour.

Nevertheless, energy production and prices operate in a highly distorted market. Costs of production and prices in relation to supply and demand don't operate unfettered. Investment in 'green' energy is heavily subsidised. So much so that in June this year David Cameron was threatening to cut green energy subsidies.

Cameron blamed these subsidies for pushing up energy bills. So the market is distorted and some argue that it needs sorting out. The political wind is turning against green energy. In any event, around 100 Tory MPs are unhappy about wind farm proposals in their constituencies, and this will influence energy policy. We in the countryside don't like wind farms peppering our landscape. Politics plays a major role in determining future energy supply.  It isn't at all clear what the government strategy is.

In his 2011 autumn statement George Osborne effectively abandoned environmental targets saying "If we burden [businesses] with endless social and environmental goals – however worthy in their own right – then not only will we not achieve those goals, but the businesses will fail, jobs will be lost, and our country will be poorer."

The government is right in one sense and that is that the subsidies for renewable energy distort the supply side market. Turbine owners received £1.2 billion in support last year. My point here then is that government already interferes with the energy market through these subsidies. It is a bit rich for the energy industry chiefs to cry foul and threaten to turn the lights out when Labour promise to control prices to the consumer. The government claim that without the subsidies, householders would be paying an average of £60 more for their electricity bills. 

We need a sensible debate about how the UK can meet its energy needs. What consumers experience is that prices go up but rarely come down and whilst energy company profits rise.

But there are two problems with the Miliband populist approach. Once government interferes with prices it is difficult to see how it stops interfering.

What happens when the freeze ends? The most likely scenario is that prices will increase. The 'market' will readjust. This has always been the problem in the past with prices and incomes policies.  They store up problems.

I suppose it is possible that prices could be linked to a clearly understood index by a toughened regulator. But  what would  be that index? Unless Miliband has answers to this question Labour spokespersons will have difficulty making the case. The easy part is saying prices are too high; the hardest part is saying what they should be and why.

Miliband has a bold policy. But the devil may be in the detail. It needs to be fleshed out.

Postscript

Predictably, David Cameron has hit back at Labour's new policy on freezing energy prices. He knows, however, that the public are angry about rising energy bills. We remember his own fumbled attempt at taking on the energy companies last year when he insisted that energy companies would be 'forced' to offer customers the lowest tariff.

David Cameron declared ''I want to be on the side of hard pressed, hard working families who often struggle to pay energy bills.''  Ed Miliband has now outflanked him.

It makes it difficult now for Cameron to attack Labour's interventionist plans directly.

So what is Mr Cameron's strategy for lower energy prices? Not surprisingly his policy is to push 'new technologies like fracking'. We will recall that Lynton Crosby, Cameron's recently appointed election guru, controversially has links with the fracking industry.  But, hey, I'm sure they never discuss it...it never comes up in conversation...no lobbying scandal here then.

Post-postscript

There are already signs that the Tories have adjusted their position in response to Labour's plans to freeze energy prices.



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