Deutsche Bank research has produced a note pointing out the dire consequences which may come as a result of Ed Miliband's populist pledge to freeze energy prices for two years. Central to Ed Miliband's justification for such a draconian intervention was the claim that energy companies had been "overcharging people for too long". Deutsche Bank begins by examining this claim with comparisons to the European energy market.
When we compare prices of “electricity, gas & other fuels” in the CPI (in same currency – EUR – terms) in the UK and the euro area, there is little difference in the rates of growth since the start of 2000. For example, over that period, prices are up by 89% in the UK versus 93% in Europe, both in EUR terms. Of course, much depends on what starting point you use as to whether UK or European prices have risen more sharply.
But, generally speaking, over the past few years (since 2008) and over a longer time span (i.e. since 2000) there is little difference. The only major differences in price increases appear when we take the starting point from between 2001 and 2006.
Deutsche Bank also point out that there remain unanswered questions with regard as to what will happen when the freeze ends. Instead of setting prices the same way as before companies may raise their prices more dramatically than they otherwise would have, to compensate for losses during the freeze.
The note also warns that if retail prices are not allowed to reflect a rise in wholesale energy prices there may be a risk of the three B's ‘bankruptcies, bailouts or blackouts'.
The cutting edge thinking emanating from the Labour party conference this week seems to be that the UK needs to hike taxes in order to eventually bailout energy companies in the hope that we can pay lower bills.