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Ed Miliband’s energy price promise

Ice cubes with flame

Ed Miliband has promised to freeze gas and electricity prices for 20 months if Labour wins the next election. It sounds like a bold move, but will it solve the underlying problems in the energy market?

Ed Miliband’s promises at the Labour Party Conference will give hope to the millions worrying about how they will heat their home this winter.

Consistently, we find that rising energy prices is one of the top worries for hard-pressed consumers, with some people even having to dip in to their savings to cover ever spiralling household bills.

Freezing prices to 2017 is a bold move and we look forward to seeing the detail of how this will work. However, the market itself is broken and temporary price promises won’t solve the underlying problem.

With rumours of yet more inflation busting energy bill hikes to come this winter, and the average annual bill standing at a staggering £1,300, it’s no wonder people are questioning whether the price they pay is a fair one.

Radical action is needed.

Ring-fence energy companies

Which? has been calling for a ring-fence of the Big Six so it was encouraging to hear Labour rubber stamping this.

While energy companies blame price rises on an increase in wholesale costs, which make up 60% of bills, or on government policies, while at the same time announcing huge profits; public trust in this industry is shamefully low. Which? research shows less than a quarter of us trust their gas or electricity suppliers.

The truth is that it is almost impossible to establish whether the price we’re paying for our energy is a fair one. For many years a lack of transparency has meant we could not establish whether price hikes are always a fair reflection of wholesale costs or confirm whether the way the market operates ensures that retail prices are being kept in check by competition between suppliers. You’re being left to take it on good faith alone that your interests are being well served.

Lack of openness in the energy market

Part of the problem is that the largest six energy suppliers in the UK are ‘vertically integrated’, supplying 98% of the domestic market and generating 70% of electricity – very little electricity has to be sold on the ‘open’ wholesale markets. Most of what other trading there is also happens behind closed doors, with estimates suggesting relatively little goes through the ‘open’ wholesale markets.

This lack of openness and external scrutiny means it is almost impossible for anyone looking in from the outside to obtain robust price information.

The very structure of the largest companies, the low levels of trading and competition on the open market and the closed nature of trading and price setting could be adversely impacting on the competitiveness of the market and on prices.

As it stands, the energy market needs fixing.

The regulator has taken steps to make changes, but we don’t think these go far enough. It’s time for radical action from all political parties setting out how to build trust and ultimately improve competition.

Comments
Member

I’m not political, but I think George Osbourne got this right – achieving a better standard of living depends upon getting the economy right. A far more useful approach than artificially tinkering by freezing energy prices for a brief period to attract the voters.

Member
Badger says:
2 October 2013

One of the tragedies of the current debate is the poor contribution that Which? have made. In a recent article they promised to tell me why prices had risen, but they didn’t. They waffled on about various “myths” about rising energy prices, interviewed the boss of some small energy company, and that was it. Pathetic! The authors even seem to believe the political cant about “market failure”, instead of asking themselves what happens when all supplier do (and have to) use broadly similar mixes of technology, pay broadly similar fuel prices, and have similar customer service and power distribution costs for a commodity product. Why would you expect prices to differ between suppliers? Fair enough, if some people don’t want to change to get better prices, that’s their call, but to claim that it’s all the fault of the suppliers is incredibly weak.

Here’s a challenge to the authors of the last Which report on energy prices, to redeem themselves from the last slipshod report: Compare 2003 with 2013, and tell me for an average bill what is the split between the following:

1) Primary energy costs (ie what it costs the companies to buy fuel, possibly splitting out the exchange rate effects of sterling from world prices, invariably in dollars)
2) Operating costs for power generation, distribution, and customer service
3) Company profits (you might want to reference that as percentage of assets employed to keep some perspective)
4) Government mandated “green” and social obligations, including feed in tarriffs
5) Government levies and taxes (so corporation taxes, climate change levies, carbon auctions, business rates, fuel duties, employer’s NI, North Sea gas duties).

I don’t know what the answer is, but my guess is that there’s a lot fewer people employed in the industry than there were, profits remain thin, primary fuel prices have rocketed, and government intervention has increased considerably.

Member
billme says:
3 October 2013

An energy price freeze will not work, the companies will raise prices before or after and it is a wasted intervention. Instead the politicians should find ways to encourage competition through simplification of tariffs, removal of fixed charges etc.