Ed Miliband’s energy price freeze is ill-considered and irresponsible

September 25, 2013

Before the last election, Ed Miliband was one of the few politicians honest enough to admit that energy bills would have to rise to pay for low carbon electricity. It was an act of political bravery.

But his announcement to freeze – in fact to cap – energy prices in his conference speech was populism dressed up as bravery. While couched in the language of taking on vested interests, the move risks making bills higher than they would have been. It is ill-considered and irresponsible.

Energy bills have gone up over the past 10 years. This is a major problem for people already struggling with stagnant wages. It has left politicians scrabbling around to be seen to do something: eg force people on to the lowest tariff, urge the regulator to get tough, castigate the “Big Six” energy giants.

There are two reasons why energy prices have risen. One is because gas is more expensive than it was in 2004. The second is because the cost of government policy has gone up. This includes carbon taxes, subsidies for renewables, a mass insulation programme and cheaper tariffs for vulnerable households. Politicians cannot really do much about the first, but they can do something about the second.

In order for the kind of government price-fixing that Miliband called for to be justified there would have to overwhelming evidence that the energy market was being run as a cartel. There is no clear evidence that this is taking place. UK gas prices are some of the lowest in Europe, while electricity prices are mid-table. There are only six big companies (although plenty of smaller firms trying to break into the market), but lots of markets that are competitive, such as mobile phones, have similar, or even fewer, big players. The market is not perfect, but is it worse than the alternative?

What will happen with the new policy? First, there will be lobbying like you have never seen before by the energy companies to set prices as high as possible (in effect it has already started). Because government will decide the “right” price for energy, its decision will be the most important factor in companies’ future success. Such a decision is impossible. No government, no matter how many smart people it employs or how many models it devises, can know the right answer. They will either set prices too high, leading to real profiteering. Or they will set prices too low. This would make investment in desperately-needed new power plants more risky, therefore making it more expensive. It would be ripe for gaming.

Of course, the latest move was inevitable. Over the past 10 years, there has been an unstoppable drift towards more government decision-making in the energy sector. It started with Labour with the disastrous Renewable Energy Target and solar feed-in-tariffs. It is a great tragedy that the coalition has failed to halt the interventionist momentum, most notably with the current Energy Bill. The inevitable conclusion is either an entirely regulated industry where prices are set by government or re-nationalisation. Without competition, prices would be even higher.

It would be more intellectually honest (and brave) to say: “I do not believe markets will ever work for energy. Politicians will never stop interfering. Decarbonisation is too important. We should nationalise generation and supply and fix all prices.” That would likely be an extremely popular, profound mistake. But at least it would be intellectually consistent.

Either way, simply by saying you will fix prices you make investment more dicey. This is particularly the case for the most risky projects. Big, low-carbon investments in nuclear and renewables do not at present look like they can go ahead without clear government support. This move could make these projects even more expensive, or vanish as investors walk away. In the end, it may well be our targets to cut carbon – which Miliband has been an admirable defender of – which will suffer.

This article originally appeared in The Telegraph.

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