Citywire printed articles sponsored by:
View the article online at http://citywire.co.uk/wealth-manager/article/a705467
Premier's James Smith: Miliband's energy policy is doomed to failure
by James Smith on Sep 26, 2013 at 11:03
In Ed Miliband’s speech at the Labour Party conference, he has pledged to freeze energy prices until 2017 and implement changes to power and gas markets in order to make the market more competitive. He has also pledged to break up the large utilities into separate generation and supply businesses. Caroline Flint, the shadow energy secretary, has also pledged to invest in home grown low-carbon British energy.
Back to basics
Energy policy has to solve three competing and contradictory factors - affordability, security of supply, and decarbonisation – the so called “energy trilemma”. These goals are to a great extent mutually exclusive. For instance, renewable energy is good for decarbonisation but is bad for affordability because it costs more. Coal fired power is affordable, but increases emissions. Investing in nuclear power helps both emissions and security of supply (uranium fuel is usually located in friendly countries such as Canada), but is expensive and therefore hits affordability.
This energy trilemma is key to any kind of rational discussion about electricity prices. Any politician who believes that prices can be made more affordable without any impact on emissions or security of supply is promising a magic trick that no other nation on earth has yet been able to achieve.
What is the experience of others?
Retail price caps have been tried before, notably in California in the early 2000s. Not going into detail, but suffice to say that it didn’t end well for either the companies (they went bust) or consumers (when the policy broke down prices rocketed) or politicians (they were kicked out).
Closer to home, France has tried a similar policy, holding retail electricity prices down below costs. This policy finally buckled this year when prices were increased by 5%, with another 5% increase promised for next year too, and very likely much more beyond.
Labour are now promising to help improve affordability, but have also said that security of supply will be maintained. They claim that by making the market more efficient they will be able to reduce prices for consumers, at the sole expense of the perceived excess profits of utilities.
There is a problem here, and it’s a big one, there isn’t actually any evidence that the energy suppliers are in fact making excess profits. Indeed, UK prices are in line with European averages. This issue has been examined on many occasions and when industry regulator Ofgem’s own enquiry concluded in June this year, they published final proposals to simplify tariff structures, but it remains to be seen whether this will actually bring tariffs down. Ed Miliband, obviously not satisfied with this approach, wants to scrap this independent regulator and replace it with one that presumably agrees with him and is prepared to take firmer action.
At the wholesale level, Ed Miliband wants to break up the companies so that power stations are owned by different companies from those that send us bills. He is ignoring the fact that utilities already have to have their generation and retail units in separate legal entities and that the power stations sell power blind, and are not legally allowed to deal direct with their own retail businesses. If anything, his proposals will increase the risks inherent in energy supply businesses, thus forcing prices up rather than down.
Finding the truth
The Labour Party likes to pretend that prices have risen due to the greed of big business. However, the truth is somewhat different.
News sponsored by: