Government’s energy price promise may be more canny than it appears

November 29, 2013

Partly in an effort to smokescreen Ed Miliband’s “biggest reform of Britain’s energy market since the privatisation of the 1980s” (Copyright every energy announcement since 1990), it was reported today (and then retracted) that the Government would ask the Big 6 not to raise their gas and electricity prices until after the General Election (unless there is a spike in wholesale prices).

Labour would have likely tried to caricature it as a weak move that will almost certainly fail: “The only way to deal with these cartel-like oligopolists is to fix prices and break them up,” or something as equally rabble-rousing to that effect (more on the Labour energy plan next week).

However, I think the Government move could have been canny politically and also raised some interesting political questions about what the role of government is.

First, it obscures media coverage of Labour’s new plan. Second, it just might work. Wholesale gas prices have been generally pretty flat for the past couple of years (after steep rises between 2004 and 2010) and there are tentative signs are that they might fall a bit over the next few years (although such predictions are pointless, therefore the Government’s caveat). Companies argue one of the reasons they have had to put up prices this year, despite flat wholesale prices, is partly because they buy power years ahead and so would not have been able to take full advantage of the unexpected flattening off. This excuse will not last for much longer.

A gentle fall in wholesale prices might offset the rise in the costs of green and social levies. The likely cut in the Energy Companies Obligation and the shift of the Warm Home Discount from bills to general taxation will also help.

Therefore, there is a strong chance that, even without a Government nudge, bills would have been flat anyway ahead of the 2015 election. If this is the case, Government could have claimed they had managed to protect hardworking (and for that matter lazy) people. Plus, they could have argued, in contrast to Labour, that they did it without reaching for the crude stick of price controls, ‘the kind of Proto-Trotskyite weapon that Arthur Scargill would have welcomed* and will inevitably lead us to street lights being replaced by candles’.

If prices do go up, as they may well have to, the Government could viciously and credibly attack the Big 6 (or 7, as we must now, presumably, call them). It also might mean they have more political space to attack some of the other stuff, such as expensive renewables, driving prices higher over the next few years. These reasons are why I think the move could have been a canny one.

But there was also the potential for a more subtle form of statecraft. Governments essentially do too much, especially in the energy sector. Ministers love announcements and press releases and new ideas, and this all finds its way into ever more law. What Government often forgets is that its position as convenor/bully pulpit/banger of heads together, is often as powerful as legislation. As ever, the economist John Kay has put it much more clearly than I could:

Perhaps Mr Cameron should use his position not to threaten legislation, but to persuade the small number of energy suppliers to reach an agreement on future conduct.

Often driven by ‘something must be done-ism’, hyperactive legislators forget that they can sometimes achieve more with cajoling, shaming and persuading than bludgeoning.

Of course, one wider problem with the abandoned announcement is that it reinforces the impression in the public’s mind that politicians can control energy prices. This is reinforced with constant ‘Prices rose x% while you were energy minister’ bickering at PMQs. This may have been why it was withdrawn.

In a liberalised market (or, for that matter in a regulated or nationalised one), they cannot control prices. Most of it is driven by international prices, of which they have no control, both of technologies and commodities, like gas. They do have control over the social and environmental costs, which are significant and are going to be more so over the next decade and they should do something about those. But it will not take us back to an average bill of £600 anytime soon. Implying you can leads to even greater public and industry frustration.

*Actually, he quite liked endless price rises, as long as they came in salaries for his workers.

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