Ed Miliband does have a point about increasing energy bills, but price caps just don’t work
Price regulation at consumer level is not in itself an alien concept in the UK. For example, water and sewerage regulator Ofwat sets separate price controls for whole-sale activities and household retail services.
Ed Miliband knows that fixing the prices of energy for consumers sounds attractive, but such state intervention is ultimately crude and unsatisfactory. On the other hand, does he have a point?
Price caps in energy were removed in 2002 because it was felt there was insufficient competition between the retail suppliers.
If there is sufficient competition, consumers can switch to a cheaper supplier. But even in competitive markets there are inefficiencies and consumers do not face perfect choices or have perfect information. This is why transparency to consumers is stressed by regulators.
At the retail level, there appear to be problems in the way the energy market works. The companies blame global rises in wholesale energy prices for rises in consumer energy prices. They also point to the cost of meeting government policies such as Energy Companies Obligation (ECO) targets for emission reductions. But while price increases have been passed on to consumers, falls in wholesale prices have not been passed on to. Suppliers have been able not only to maintain prices, but to increase them. Ofgem data shows between 2009 and 2013 consumers’ dual prices rose by about 24 per cent from £1,145 to £1,420 a year.
Also, consumers do not readily switch suppliers, giving incumbent suppliers an advantage and disincentivising potential entrants to the market. Ofgem has not found evidence of collusion but is aware there are problems at wholesale level, partly because of the absence of new entrants.
So Miliband does have a point: the retail energy market is not working to consumers’ benefit and something should be done about it.
But price controls generally are inefficient, crude and do not solve the problem. Each supplier has multiple tariffs so at what point would a tariff be frozen? How would Miliband punish suppliers for pre-election price hikes? The proposed price freeze of 20 months is too short to enable regulatory consultation to take place and to then introduce a new energy regulatory framework.
As a principle, most economists agree that price controls do not increase consumer welfare. Where prices are held below their natural level, capital will leave the industry to seek better margins.
In an environment in which investment is desperately needed in energy projects, Miliband’s message is not a good signal to the markets. But it does offer a strong signal to the regulators to act now on the current inefficiencies.
Mauzima Bhamji is a senior associate at Field Fisher Waterhouse