Analysis: Energy Price Freeze Is Doomed To Fail
Labour’s price freeze idea is bad for investment, bad for security of supply, and bad for consumers. But if it forces the political class in this country to wake up and tackle the reasons why costs are actually rising then some good may come of it.
Ed Miliband has set out a series of reforms that he claims will mend the ‘broken energy market’, punish the big supply companies for alleged over-charging, and address consumer concerns over rocketing electricity and gas bills.
The centrepiece of his proposals was a freeze on gas and power prices to both homes and businesses from May 2015 to January 2017. Labour estimate that this will save consumers at least £4.5billion during the freeze.
The first problem is that the proposals don’t tackle the actual causes behind rising bills.
The reasons bills are rising is clear. First, the UK now imports around 50per cent of its gas. World gas prices have risen in recent years due to demand from China, and more recently Japan after the Fukushima accident.
Second, the last Labour government decided to sign up to EU climate change targets that require the UK to move from a largely fossil fuel-based power system to one that is overwhelmingly based on renewable and nuclear power by 2030.
This requires at least £150billion of investment this decade and the same again in the 2020s. That is the equivalent of one and a half Olympic Games each and every year for 20 years.
The last Labour government promised the energy industry good returns if it made this investment and guaranteed to them that UK consumers would pick up the bill. It is now apparently shocked that the £300billion IOU has to be paid.
A price freeze is very likely to have the opposite effect to the one intended.
The big six suppliers will be forced into buying their energy for 2015-17 ahead of time to try and fix their costs.
That is going to be expensive as they will have to pay a premium for doing this, so expect to see this cost in your bills sooner rather than later. Labour’s intervention is certain to put new investment into a big chill. Anyone who thinks otherwise is either naive, mis-guided, or plain stupid.
Industry regulator Ofgem is already warning that the UK faces the risk of blackouts in 2015 because the coalition has bizarrely pressed ahead with closing coal-fired power stations despite the fact that the replacement new build program is running at least three years late.
Labour’s proposals will inevitably delay new build further. The result will be higher wholesale power prices.
So if Labour’s policies won’t bring down bills, what will? Put simply, you can either tackle the reasons costs are rising or change who pays.