Why Miliband is Wrong on Energy Policy

Source: ASI

This article was originally published in the Young Fabian’s quarterly magazine, Anticipations (Volume 18, Issue 1 | Autumn 2014).

On this we will agree: the corporate monopoly dominating the UK energy market needs to come to an end. Currently, British customers have a total of six firms to choose from in the energy market, all of which offer very limited price distinctions.

And those prices keep going up. Since 2010, gas and electricity rates have risen by three times the rate of inflation (10.2% between 2010-2013). Quite rightly, the Big Six are constantly under attack from very political party in the UK for over-charging customers and raising retail prices, even when wholesale costs fall. With such little competition in the energy market, mega-firms can charge extortionate prices, and customers have no choice but to pay the bill.

Another point of agreement: a change in government regulation is key to breaking up this monopoly. Both Labour and Conservatives acknowledge that government regulations, like Ofgem, aren’t holding the Big Six accountable for what they charge customers. Over the past few years, party leaders have come up with new variants of the Regulatory State to combat the problem. Most recently (and most misguidedly) Ed Miliband has advocated for a government-mandated freeze on energy prices, which would force firms to fix their prices for 20 months, regardless of future changes in market conditions.

Why is this misguided? Let’s put aside Miliband’s refusal to acknowledge the costs that are loaded on to energy companies by the state (ie: requirements to source energy from renewables), which in turn, gets pushed onto the customer and focus on a second, more important point: Miliband’s policy proposals reinforce the energy monopoly.

It’s near impossible to create a market monopoly without help from the ultimate monopoly; that is, competition in the market place is so often drowned out, not by competitors, but by the state.

The energy sector is a prime example of well-intentioned government regulation gone awry. The sector is regulated so heavily, through both onerous compliance requirements and heavy taxation, that it is near impossible for any budding energy firm to compete with the Big Six. In its effort to stop energy firms from over-charging customers, the state has effectively regulated all competitors out of the market, re-enforcing the monopoly it was trying to prevent.

The bureaucratic, slow-moving nature of government bodies means that they are not equipped to understand or anticipate the unpredictability of market prices on energy. The security of energy supplies, complexities of long-term contracts, and real commodity costs are often dismissed by politicians who have made unsustainable, politically motivated promises to voters. Whilst the Big Six have no incentive to bring energy prices down when they can, a Labour prime minister would have no incentive to bring the prices up even when he must.

Britain needs appropriate, scaled back monitoring of the energy market that removes ‘safeguards’ for the Big Six’s market share and introduces healthy competition in the market place. A less-regulated system where consumer choice dictates the real price of energy would see monthly bills drop. But piling price fixation on top of bad regulations will produce a lot of heat and very little light.