Ed Davey MP writes… Labour’s energy policy is a con

Energy-bills-006“There is no such thing as a free lunch” was one of the first things I learnt in economics. But it seems that Ed Miliband thinks there is. He seems to believe that you can have freeze energy prices for 20 months with no adverse impacts. It may have seemed a politically smart thing to do leading into the traditional period of energy price increases. But it is likely to have really harmful consequences. In short, it’s a con.

Many commentators have already pointed out that energy companies will be free to increase prices before or after the freeze to compensate. But it will be worse than that.  In reality consumers will end up paying more. Energy companies will buy more of their energy in the forward markets but at a premium. Furthermore the uncertainty caused by Labour’s policies will push up the cost of capital for the companies we want to invest £110bn over the next decade. In a letter to the Times small supplier Utilita summed it up “Thanks to Ed Miliband price rises in the energy sector will now be bigger and earlier than they otherwise would have been”

Labour’s energy policy is an incoherent mess. They want to bring back an electricity pool which they abolished in 2001 at a cost estimated by the National Audit Office of £1.4 billion because it ‘operated to the detriment of consumers’. They want to abolish the energy regulator OFGEM which they set up in 2001 because they say its powers aren’t strong enough. But they won’t tell us what extra powers they will give it. And they want to break up the Big 6 even though it was they who allowed the Big 6 to form when there were previously 14 supply companies and 3 generators.

It is no surprise then that there has been almost universal condemnation of the plan – not just from the Big 6. Small energy suppliers – those who are particularly important to promote greater competition – have been particularly scathing. The CEO of the largest of the independent supplier First Utility said “Bluntly it could put me under” whilst the MD of Ovo, the second largest said “It’s not going to help consumers.”

But at least as worrying is the effect Labour’s energy policies will have on investment to keep the lights on and to boost green energy and jobs. The coalition has a superb record in attracting investment into renewable energy – over £35 billion committed since 2010 alone resulting in renewable electricity generated more than doubling from 7% when the coalition government came in to 16% now. We still have a lot to do given the £110 billion black hole in investment which Labour left us.

The combination of the price freeze and Labour’s other energy policies creating uncertainty will mean that investment will drop off for several years at least if Labour were to implement their pledge in 2015. As John Cridland of the CBI has said:

The proposed energy price freeze will deter much needed investment and is at odds with Labour’s pledge to decarbonise the economy and create a million green jobs.

Of course households will be suffering from energy price increases – but let’s not forget that prices went up an average of 10% a year under the last Labour Government – higher than they have under the Coalition Government.

We know that the Tories cannot be trusted to protect the environment. We know that Labour do not understand business and how investment decisions are made. Only the Liberal Democrats understand how important business and the environment are to our country’s future.

Tomorrow I will outline what Liberal Democrats in government are doing to keep down energy bills.

* Ed Davey is the MP for Kingston & Surbiton and Acting co-Leader of the Liberal Democrats

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19 Comments

  • Eddie Sammon 17th Oct '13 - 1:09pm

    I wouldn’t go as far as saying it was a con, but I will predict that it won’t work because it’s too much of a deterrent for investment. I am displaying nuance anyway. It is concerning me at the moment that the Lib Dems are letting this debate get dominated by Labour and the Conservatives, so I am interested in what Ed Davey has to say tomorrow.

    Personally I think we need to whack the energy companies a bit and also reduce green taxes. We can’t just throw the poor under the bus because we want a green future, but I also think we shouldn’t just reward the energy companies for this behaviour by cutting their costs, which is what the conservatives are minded to do.

  • My energy company just increased its rates by just under 10%.

    Whining about Labour doesn’t bring my bill down.

    You’re in charge, what are you going to do about it?

  • There’s a nugget of good sense in Labour’s policy, and it’s around reinstating the electricity pool (or an exchange as Americans would call it and probably a more accurate description.) This basically does to the energy supply market what the Lib Dems have done to the banks in ring-fencing supply and distribution operations.

    So everyone sells energy into the exchange, all prices are transparent and comparable, and the energy companies then buy at a standard price from the exchange. As things stand, we have no transparency over where the energy companies are sourcing energy from, and at what cost. An exchange / pool would let us see exactly how much energy is costing to produce, what mark-up is applied when it’s sold to us, and prevents any cartel forming because anyone who can supply cheaper into / out of the pool will have a clear market advantage.

    We should support Labour on this – the fact that the rest of their policy is a load of populist and dangerous nonsense shouldn’t scare us from backing the gem in the muck.

  • Simon Bamonte 17th Oct '13 - 3:14pm

    Labour’s policy might have flaws and not be fully thought out, but at least it seems they’re starting to understand the full extent of full poverty in this nation. This whole article reads like a partisan attempt to say “the poor energy companies will suffer if Labour get into power.” Well, boo hoo to them. On the day when another of these blood suckers announced their prices are going up by over 10%, do you really think tribal sniping and sounding as if you’re on the side of these companies is any comfort to anyone other than their fatcat bosses and slightly thinner shareholders? We are one of the wealthiest nations in the world, yet how can you look us in the eye and say you’re keeping prices down when prices are going up much faster than inflation? How can you write this when there are vulnerable people (pensioners, disabled, those on very low incomes) who have to choose between heating and food? Is it any wonder why a recent BBC poll showed almost 70% of people wanted these cartels nationalised (http://www.rtcc.org/2013/09/05/bbc-survey-highlights-uk-public-support-for-wind-and-solar/)?

    The real con here, Mr. Davey, is the energy companies cartels, who are raking in record profits and bonuses while people freeze to death. There is no excuse for this happening in the UK. When people are freezing their bums off in winter, your answer seems to be “we can’t really do anything radical because we don’t want to upset our friends in the industry.” You defend the Big 6 and talk about how a small company worries about going under, while saying nothing of the people who freeze to death during winter while the greed in this industry goes unchecked. From this article, it seems pretty obvious whose side you and this party are now on. I’m not planning on voting Labour, nor do I support them, but I’m starting to agree myself that these cartels should be broken up and re-nationalised.

  • Well whatever he comes up with I hope its better than the depressing performance we saw today, where his big idea was to switch suppliers……..

  • David Blake 17th Oct '13 - 4:31pm
  • @ tpfkar

    Couldn’t agree more with your post. I was staggered to find out that with the ‘big six’ generating 70% of the UK’s power the vast vast majority of trades in energy are shady bilateral deals between these companies or worse still trades inside these company from their production to retail outfits. Hardly any trades are made on the ‘wholesale market’, the much talked about wholesale price rises we hear on the news are a joke, we have no idea what the majority of energy is costing these companies. Combine this with creative accounting techniques used by the companies look like they’re earning only making 5% profit and the whole thing’s a murky mess. I’m amazed Ed Davey can’t see this.

    I really thought with the Lib Dems getting the energy ministry in coalition we could make real progress on clearing up this mucky market while securing energy supplies for the future. We’ve completely dropped the ball on this and I wholly back Labour’s proposals to make the market more transparent.

    Get a grip on this now, it’ll rightly be a big battleground next election.

  • Ed Davey says , “We know that the Tories cannot be trusted to protect the environment.”
    But can we trust any party that is enthusiastic about a new generation of UK nuclear power stations with majority ownership in the hands of the authoritarian government of the Peoples Republic of China?

    Osborne says he is enthusiastic about majority chinese ownership of nuclear power stations n the UK.
    Caroline Flint says Labour is enthusiastic about Chinese Government majority ownership of nuclear power stations in the UK.
    If Chinese ownership of UK nuclear powers stations is such a brilliant idea, why not Iran?

    How long before Ed Davey, Caroline Flint and George Osborne go on a joint mission to Iran to seek investment in UK nuclear power stations?
    And if nuclear power stations are so safe why not put one on the site of Battersea Power Station?

  • Simon McGrath 17th Oct '13 - 9:38pm

    “Well whatever he comes up with I hope its better than the depressing performance we saw today, where his big idea was to switch suppliers”

    why is that a depressing idea? – in many cases would save people money

  • Little Jackie Paper 17th Oct '13 - 10:41pm

    Mr McGrath – Well I think it is depressing. When the best that a minister (of any party I stress) can come up with is decide that the only way to act is to turn the country into a load of wheeler-dealers looking to save £150 over three years maybe subject to availability and exit clause, then yes – I think people are entitled to wonder. Where does the corporatism end in policy?

    It is exactly your sort of thinking that fails to grasp just why Ed M’s energy price freeze has resonated. Yes, it may well be a flawed idea. I’m dubious for sure. But it is popular because a great many people in the country have just had a gutful of the idea that what’s good for business is good for everyone else.

    Oddly of course energy perhaps wasn’t even the best target for Ed in the sense that there is some credible suggestion that the energy market in the UK is in a better state than many think. http://eandt.theiet.org/news/2013/sep/uk-energy-rating.cfm.

    It’s exactly the same set of principles with train fares and fare structures that are designed to bring about, ‘competition.’ Granted, it is nice to know that if I can plan my trip six weeks ahead and travel at 11:30 on Tuesday it will be cheap. But I have to weigh that against the fact that if my Dad keels over on a Saturday afternoon a walk-on fare will cost the best part of a week’s wage. Stability and security matter a lot to a great many people who do not have the capacity to absorb financial risk or flexible motives. What is depressing is that successive ministers have failed to grasp that there is more to transport than having the occasional cheap fare on the books.

    Does anyone really know what a good decision is in all this competition, or how to make one? We seem to have an army of ‘choice advisers.’ I can’t walk through the local shopping centre without having to fend off salesmen for utility, TV, phone, financial services. Every time I go to the bank the counter staff try to sell me something. And this is before we get to misselling and high salaries, profits etc. One wonders what the advertising expenditure of some of these companies is.

    It is depressing because the sense lingers that ordinary people don’t want to play the games and run the risk of significant overpayment on important services – that the necessary flipside of the winners is the losers. Worse, the sense lingers that what we are seeing is competition that benefits the providers at least as much as anyone else. Granted, maybe some of it is less than fair. With energy what no party will say is that the devaluation of sterling to toilet paper status is rather a big problem (in the short-term at least). But even making allowances the perceptions are deep set and frankly many are choosing to believe the evidence of their own eyes.

    And all of this is to say nothing of questions about foreign ownership.

    Maybe in some measure the questions are perhaps about confidence rather than the principle of competitive, privatized provision per se. But the point remains that it is depressing that the best advice that ministers from successive governments have for the hard-pressed is, ‘play the game and cross your fingers.’ Whilst I might have reservations about Ed M, it is just that little less depressing to hear someone actually come out and say something out of line with the UK’s corporatist orthodoxies. That, not £150 over three years on my gas bill is what it is about.

  • “Labour’s energy policy is an incoherent mess.” That’s a bit rich. How on earth would you describe the LibDem/Tory energy policy? A raging success? I would describe it words I cannot use here, and I suspect a majority of the electorate would concur.

  • @simon

    And in addition to @Little Jackie Paper’s excellent points, rather than Davey telling me to spend my time chasing the elusive deal (I bet those who took his advice and switched from SSE to British Gas a week ago are really happy with that sort of advice) I would much rather he concentrated his mind on how the big energy players are essentially acting as manufacturer, distributor point of delivery all at once, an opening up of their books as to where their money is going, and an explanation of how profits have increased 79% since 2009 – if those things are done I might be interested in playing mini-capitalist.

    Although to be honest I wont, as I have always regarded the fanciful notions of ‘choice’ in these sorts of businesses as nothing more than deliberate and well crafted marketing ploys to pull the wool over the consumer’s eyes while they wallow in their cartel status.

  • Martin Pierce 18th Oct '13 - 9:08am

    Dearie me, can’t we do a little better than repeating Cameron’s catch phrase?

  • Helen Dudden 18th Oct '13 - 9:49am

    Well heat or eat should be your catch phrase.

    Not too clever what you are doing is it?

  • Switch suppliers ! He must be joking you. There are few suppliers, little competition and you can’t easily work out who, if anyone, is offering the best deal.
    I thought. Gas and Electricity prices where tied into oil prices. Petrol prices are down. By 5.5p a litre!

    No room for complacency. Ed Davey must try harder for the benefit of all consumers and not just the bosses and shareholders. Courage Ed.

  • David Allen 18th Oct '13 - 1:23pm

    Once upon a time, Labour would have had more trouble with sloppy, populist nonsense like this “price freeze”, which will only be possible if fuel prices stay stable (in which case it won’t be necessary!). Once upon a time, Labour had a competitor on the centre-left who often outsmarted them, and pressurised them into improving their act. They were called the Liberal Democrats. Nobody remotely similar is now on the political scene.

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