Price controls don’t work. It’s time to empower consumers

 
Allister Heath

CONSUMERS and politicians should draw very careful lessons from the news that SSE, the energy giant, is freezing its prices. This is hardly the victory that some on the left believe it to be.

Ed Miliband’s attack on the energy industry last September came at a time of elevated wholesale costs in the energy markets. Since then, these key prices have tumbled, for a variety of reasons, an important development which has gone largely unnoticed amid the debates in Westminster.

Ordinarily, lower wholesale costs would translate into actual retail price cuts, not a mere price freeze. So why is this not happening, and what is really going on? It seems that the spectre of extreme political uncertainty and the political/PR advantage of introducing a price freeze means that firms are seeking to protect themselves as much as possible, prior to the possibility of tougher times ahead. The strategy is to lock in costs now and hope for the best.

The coalition has cut some green levies, pushing the burden onto general taxation. Gas prices have tumbled by 12 per cent since last summer, as Peter Atherton of Liberum Capital, the best analyst in this area, points out. Together with the freeze in the carbon price floor, this means that base load prices are down by 9 per cent year on year. Last but not least, electricity network costs are likely to fall next year.

It is a fair bet that Labour’s threats are now leading to higher prices than would otherwise have been the case, in a spectacular example of the law of unintended consequences in action.

There is another reason why the Labour party and its supporters, especially those of a green bent, should not be declaring victory.

SSE has also decided to cut back on its offshore wind plans – for now at least – and is slashing overall capital expenditure from £1.6bn in 2014-15 to £1.3bn until March 2018.

This was exactly what critics of Ed Miliband’s price freeze had warned about: political war on energy utilities is bound to lead to less investment, at the very time when everybody agrees that more needs to be spent.

We need a properly functioning energy market. The current set-up, despite the coalition’s minor reforms, is flawed for two reasons: costs are still high because of the political decision to rely so much on expensive renewable energy; and consumers don’t tend to shift suppliers enough.

The second of these two issues is being tackled head on by Henry de Zoete, a former education special adviser. He has just launched an excellent venture called The Big Deal on Energy. The aim is to get as many people as possible to sign up online – and The Big Deal will then seek to negotiate the cheapest possible bulk contract for gas and electricity prices on their behalf. This is likely to have more effect than any lengthy probe from the Competition Commission.

Since January, the government has banned energy firms from offering more than four tariffs. As it happens, I disagree: I think it was a mistake to do this, but that is not the point. There is a clause in the rules which allows energy firms to offer a fifth tariff – but only in the event of a group switch.

While not new, the idea has yet to be implemented in a massive, industrialised manner in the UK. Collective switching has delivered savings to more than 1m people in Germany, Holland and Australia. Which?, the consumer group, and local authorities have pioneered this in Britain.

But de Zoete’s project aims to take this to another level – there is no limit to the number of people who could join – and to make the energy market work much better for the consumer in a bottom-up manner, without government or regulatory intervention.

Crude, anti-capitalist devices such as price caps will backfire spectacularly – and in fact, the mere threat of them is already hurting consumers. There is only one workable solution: we need a proper, competitive free market.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath