It is now 6 days since Ed Miliband’s announcement that if elected, he would cap energy prices for 20 months, while undertaking a restructure of the energy market intended to bring lower prices in the long run. Some details have followed, for example that the cap would not necessarily be set at the May 2015 price, but may be set at an earlier price if energy companies appear to be hiking prices to beat the cap. This wouldn’t stop them hiking prices to build up a war chest.
George Eaton in the New Statesman called this a “brilliant trap for the Tories”.
One senior Labour strategist told me after the speech that the party had focused-grouped the policy and that voter approval was “off the scale”.
…
The Tories’ natural free-market aversion to price controls means it will be hard for Cameron to support any form of cap, but he will be reluctant to allow Labour to claim that he has taken the side of companies over consumers and again stood up for the “wrong people”.
Our own Alisdair Calder McGregor concurred that it is excellent politics for Labour.
In announcing this 18 months before the next general election, Labour aims to worry the energy companies into a pre-emptive price hike. If the energy suppliers see a price freeze coming, they will inevitably seek to mitigate the risk by raising prices ahead of time.
This then gives Labour the justification to exclaim, with horror, ”Look at these price rises. That nasty coalition is doing terribly on the cost of living!”
Thus the entire exercise becomes a self-fulfilling prophecy.
How could Ed but stand firm amidst the praise.
Opponents were reduced to condemning not the politics, but the actual consequences of the policy. Nick Clegg agreed that we need to do more to help with the cost of living, but dismissed the “magic wand”.
And Peter Mandelson’s contribution was probably welcomed on both sides.
Lord Mandelson has raised doubts about Labour’s plan to freeze energy bills, suggesting people may think it is going “backwards” in its industrial policy.
The ex-business secretary said he believed the party had moved on from the days of having to choose “between state control and laissez-faire”.
But the last word goes to the impeccably even handed and straightforward Tim Harford.
Mr Miliband’s message is: “Energy price rises are bad. I will make the bad thing stop.” This shows all the political maturity of a 10-year-old – which does, admittedly, place him firmly in the mainstream of British politics. It’s almost as though he looked enviously at chancellor George Osborne’s Help to Buy policy and wondered if he could possibly find something as crude, populist and ill-advised as that. He has succeeded.
What is focus-group-driven politics all about, but the search for the right bad policy to appeal to the target demographic?
* Joe Otten was the candidate for Sheffield Heeley in June 2017 and Doncaster North in December 2019 and is a councillor in Sheffield.
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22 Comments
Well nPower and Scottish Power have announced tariffs that are fixed until 2017 and if the market is operating normally we can expect others to follow. Whilst these do carry a premium over today’s prices, it isn’t as large as one would of first thought, with some current tariffs being considerably higher.
Looking at just how much of the typical energy bill is down to government imposed levies/indirect taxation, I wonder whether the energy companies will use these tariffs as public leverage against government attempts to increase levies, plus also getting government to take on a larger share of the bill and risk associated with much needed capital investment…
Hence if I were an energy company I would be looking seriously at doing a Ryan Air and unbundle the bill, so the consumer can clearly see the composition of their bill; then offer deals based on the components of the bill I have control over.
The fundamental problem is that demand exceeds supply and pushes up the price. The good news about that is that it makes greener energy sources more competitive, albeit there is still a big price gap and will be for a long time. The bad news is that we end up getting fuel poverty, and related to that is food poverty as agri chemicals rely on oil as well. The proposal by Ed Miliband provides a temporary fix for 2 years, but decreases the incentives for greater energy efficiency and alternative energy sources. In the meantime our great concern should be the lack of progress of the Green Deal. What I see is politicians from all political parties struggling to find answers to this monumental problem.
I thought the price freeze was to allow time to break the integration between the generators/ wholesalers and the retail market – thus introducing genuine competition. Long term price freezes won’t work, but for a short period it makes sense.
Tim Harford has it exactly right. This is an awful policy but utterly populist. I’m afraid this lines up Ed Miliband alongside the Nigel Farages of this world who offer simplistic, populist but ultimately flawed solutions to complex problems. But then Ed M is showing time and again that he’s prepared to do the wrong thing any time if it will score him some political points.
@ G Payne “if I were an energy company I would be looking seriously at doing a Ryan Air and unbundle the bill”
Belatedly this is what some of them are doing. For example, British Gas have shown that roughly 85% of their bill is outside their control, comprising wholesale gas/elec (price determined by international markets), delivery (price regulated and not set by them) and some eye-watering taxes and levies. The remaining 15% includes operating costs (about 10%) and profit margin (about 5%). 5% profit is not enormous given the huge risk and volatility of energy markets. But this sort of analysis is not well publicised – it’s easy to blame the energy company for the 100% of the bill they deliver to the customer when they actually control only 15%.
@ Jenny Barnes “thought the price freeze was to allow time to break the integration between the generators/ wholesalers and the retail market – thus introducing genuine competition”
This is by far the worst (and most badly thought out) bit of Labour’s plan.
The competition in the energy industry in this country is far better than anywhere else in Europe. As a result, we have the lowest retail prices in Western Europe (Eastern Europe has cheaper prices – thanks to Russian supply). Labour oddly holds up France as having a better energy market than us – but the French pay much more for their energy despite the wholesale price in France being lower.
As for integration between generation and supply, this allows energy companies to hedge against energy price fluctuations and as a result takes some risk – and thus cost – out of their business model. Requiring these to be split won’t reduce prices. Also there’s the small matter of many of the energy companies operating in the UK being foreign owned (eg. EDF, EON, RWE) – I’d love to see Ed asking the French and German governments to split up their energy giants!
Despite wall-to-wall criticism in the media of Milliband’s announcement to the extent that any other policy ideas were drowned out, Labour have enjoyed a significant boost in polling after their conference.
Despite relatively little negative coverage of the Lib Dem conference for a change, and a big announcement of universal free school meals and pre-announcement of tory marriage tax plans, the Lib Dems polling is still dismal.
How many more bad policies will Lib Dems try in their search for the right bad policy to appeal to their target demographic?
Here’s a better link re the breakdown of energy bills:
http://stage.outsideline.co.uk/british_gas/lightbulb/dev_v0003/
Julian Tisi
Remind us who you work for again?
The competition in the energy industry in this country is far better than anywhere else in Europe.
You don’t say for whom it’s better – could it be for the oligopolists?
All this talk of “our prices are still some of the best in Europe”….
Just because the mugger only took £9 from you but took £10 from his previous victim still means you were mugged.
The energy companies bluff should be called absolutely if for no other reason than their appalling blackmail when the policy was discussed.
When asking several times fails to work you might have to consider telling, and really it’s the fault of the energy companies that popular policies like this are popular at all!
@bcrombie
You got me. I’ve been quite open in the other forum – and happy to do so here – that I do indeed work (in a lowly capacity) for an energy company.
jenny, no. Energy prices are lower than western Europe. That’s what better competition means.
Maggie, there was no blackmail. No energy company has a duty to invest in anything, any more than you have a duty to invest in them. The bottom line is that we want them to make the free choice to invest, and the way to do that is to give them confidence that the rules won’t be arbitrarily changed later on to deprive them of the return.
We can’t (and wouldn’t want to) guarantee that rules won’t change in future – parliaments cannot bind their successors – so there is always going to be a “regulatory risk premium” to energy prices. If you make noises to increase regulatory risk, that premium goes up. Sure as eggs is eggs. The only realistic way of significantly reducing this premium that I can see would be transferring the power to regulate energy markets to the EU. But I’m not sure the EU is quite ready for this.
To say that energy prices are the fault of the energy companies is obviously on one level correct, but seems to imply that they have a duty to us rather than their shareholders when they set their prices. They have a legal duty not to operate a cartel, but beyond this they pitch their prices to maximise profits. Prices that are too high lose customers. .
And the way that markets correct shortages is by high prices which encourage new investment and new entrants, to capture a share of these high prices. Try to squeeze the prices out and you are setting up shortages and therefore even higher prices for the future.
Harford again on Miliband:
He has achieved the remarkable feat of damaging the country before becoming prime minister; most party leaders wait until they win an election before they start screwing it up.
@Joe Otten “Energy prices are lower than western Europe. That’s what better competition means.”
Is that true though?
Listening to a tory politician being interviewed by Andrew Neil yesterday, he constantly ignored Neil’s point that energy prices before taxes (i.e. the bit that the industry controls) are higher in the UK than most of Europe, suggesting that competition is not working.
I agere with the first part of Geoffrey Payne’s comment. Let the energy companies hike prices. That will incentivize greener energy solutions, and get more homes producing their own energy in the long run.
Miliband’s proposal – a TEMPORARY freeze for about 20 months, while considering other options for resolving the market failures in this sector – hardly amount to a return to 20th century state corporatism.
A more sensible response to his announcement would have been to welcome the possibility of temporary relief for hard pressed customers, while offering sensible suggestions for what other market enhancing options (breaking up the big six?) Lib Dems might find acceptable in any future Labour – Lib Dem coalition.
This is a high profile Labour policy – a red line, if you like. Sensible cabinet ministers would thus maximise their options, instead of which we have an energy secretary – and several acolytes here – effectively hysterically pointing and shouting ‘socialism’ at the first sign of quite moderate interventionism.
Lib Dem reaction to Ed’s plan has been characteristically slippery.
When it suits, Lib Dems are happy to appeal to the latent ten-year-old in all of us by appearing to back the idea that energy price rises are bad, and that reducing bills would be desirable. For instance, back in January Ed Davey wrote an article for LDV in which he praised South Lakeland council’s collective switching scheme. Cutting households’ bills by £100 pa was, we were given the distinct impression, a Good Thing.
Eight months later, and Davey was telling the BBC that Labour’s price freeze could lead to “the lights going out”. RIght, so keeping bills down is only a Good Thing, apparently, when a very small number of people benefit. People who, in the case of schemes like South Lakeland’s, happen to be internet-savvy – probably young, educated, and Lib Dem-voting too. Everyone else should pay much higher bills to subsidise the lucky few and keep the lights on, so goes Davey’s logic.
Likewise, Nick Clegg mocks Milliband’s “magic wand” solution, but five years ago when in opposition he was constantly urging Gordon Brown to wave a similar magic wand. This from February 2008 :-
“Will he now agree to act in following our lead more urgently on another issue—namely, the scandalous profiteering by UK energy companies at a time when 25,000 people are predicted to die from the cold this winter alone? Does he realise those companies stand to make a £9 billion windfall profit from the European emissions trading scheme? Does he agree that that excess profit, equivalent to about £360 for every British family in this country, should be handed back to the neediest customers through lower energy prices?”
£360 for every family makes Labour’s price freeze look very modest indeed. Yet we’re told that Labour’s plan is economic madness. Of course, in the five years since Clegg talked about the energy companies’ “scandalous profiteering”, prices have rocketed further and said companies have made record profits year after year.
The Lib Dems are all at sea on this one – attempting to take both sides of the argument at once, and frankly looking mightily miffed that Milliband has finally promised to take the kind of action that Lib Dems were once in favour of.
@Stuart Mitchell
That’s an amazingly silly argument.
Only someone being deliberately perverse couldn’t see the difference between Lib Dem-controlled South Lakeland District Council’s innovative collective switching scheme to cut energy bills and the idiotic Labour proposal to “freeze” high prices.
@Simon
Of course I can see the difference between South Lakeland’s scheme (which isn’t even innovative – others have done it before) and Labour’s new scheme, though you seem not to be able to. The Lib Dem scheme helps a tiny number of people at the expense of everybody else. Labour’s scheme would freeze prices for everybody.
Lib Dems believe in low prices for the few and high prices for the many. Or at least they seem to now – not so long ago they said they believed in something very different (see quote from Nick Clegg in my previous post). I have even seen Lib Dems arguing, apparently seriously, that Labour’s plan is superfluous because the energy companies are already offering long-term fixed-rate tariffs. Talk about missing the point.
Stuart Mitchell
“Labour’s scheme would freeze prices for everybody.”
Really?
So what would happen if the world price of energy went down? Prices would stay high under Labour, would they?
What would happen if the world price of energy went up substantially?
@Simon Shaw “So what would happen if the world price of energy went down?”
My understanding is that Milliband was proposing a cap rather than a freeze, so if the world price of energy went down, consumer prices would be able to go down in just the same way as they do now. Well, in the same way they should do, anyway.
“What would happen if the world price of energy went up substantially?”
I guess we’d all be shielded from the increase. Yippee! If there were problems though, then if there is no small print in the legislation to allow a price rise, I’m sure that Parliament could simply choose to change the cap in the same way it sets it.
Overall, it surprises me how vexed Lib Dems have become over this issue. It doesn’t seem a million miles away from the sort of thing Cable was suggesting a few years ago, and in the past we have happily called for something to be done about excessive price rises. I am much more concerned by the laissez-faire attitude of some posters on this site than I am about Labour’s proposals to do something about rising energy prices in a market of dubious fairness. Can we not find a way to improve the idea rather than reject it so frantically?
@Simon
“So what would happen if the world price of energy went down?”
Expect that to happen around the same time Beyoncé moves in with me.
From next week’s Sheffield City Council agenda:
(g) regrets that the Council’s main opposition group’s spokesperson for energy [that’s me] has followed the line of the Conservative Party in defending the energy companies rather than Sheffield families and is extremely concerned by the following comments he made in “Lib Dem Voice” on 30th September, 2013 “No energy company has a duty to invest in anything” and “To say that energy prices are the fault of the energy companies is obviously on one level correct, but seems to imply that they have a duty to us rather than their shareholders when they set their prices. They have a legal duty not to operate a cartel, but beyond this they pitch their prices to maximise profits.”
(h) believes that this demonstrates that the main opposition group is only concerned with defending the excessive profits of the big energy companies and has no concern for Sheffield’s hard pressed families who are faced with extortionate increases in their energy bills;
…
If only they had read and tried to understand the parts they didn’t quote…