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Energy – A key election battleground

For aofgem straplinenyone in any doubt that energy is a key battleground for the 2015 General Election will have been left in no doubt that that is exactly what it is after last week’s myriad of claim, counterclaim, argument and disputation.

Sadly, as one would expect from a modern day political process, much is based on misinformation, wilful or otherwise.

Yet there are some elements that cannot be dismissed so easily.

Labour, who more so than the Conservatives, need a battleground they can stake authority on, and as such commissioned a piece of work, undertaken by the House of Commons Library, to establish the impact of energy price rises.

The analysis found that the poorest 10% of households had seen their energy bills rise at nearly double the rate of the rest of the nation since 2010.

Unsurprisingly Labour wasted no time in calling for Ofgem (who incidentally Miliband has already ‘committed’ to breaking up if he should taste victory in May) to be given the power to set prices by forcing the energy suppliers to cut prices at their behest when they deem wholesale prices to have fallen sufficiently.

This clearly is a very bad idea. Yet it is a very attractive one for populist messaging. That Ofgem are utterly incapable of making such commercial judgements, and for that matter so would any other disconnected party working on the level of assumption necessary to reach that decision, again appears to have passed Miliband by.

Happily it did not pass the Commons by and Miliband’s latest daft and ill-thought through plan was soundly defeated by 305 votes to 228.

That said from our own BJMMI index, it is clear that retail prices do not follow the wholesale price in the same magnitude (either reductions or increases), yet this is more to do with the dilution of the impact of the wholesale price on the retail price due to the myriad taxes and network costs placed on energy bills by….. the government and Ofgem.

As we’ve said before though, that simple truth is a less attractive one as a soap box for election seeking political parties.

That is not to say however that suppliers are entirely innocent victims of a market they cannot control, rather it is that there are wider factors at play that cannot be swiped aside in a soundbite.

The market remains opaque, the level of taxation is too high and the years of neglect by successive governments in the energy networks and their failure to develop new generation plant is now filtering through to emergency costs on energy bills.

That successive administrations have also been seduced by a subsidy frenzy to diversify energy generation away from fossil fuel plant has not helped the cause either.

Labour’s research however found that:

  • The lowest 10% of households on the income scale saw their electricity bills rise by 39.7% between 2010 and 2013, compared to
  • 5% for the top 10% and
  • 2% for the average household, whilst
  • gas bills increased by 53.3% for the poorest group, compared to
  • 9% for the top 10% and
  • 2% for the average household.

Caroline Flint, the shadow Energy Secretary, said:

“These figures show that the poorest households are paying the heaviest price for the Tories’ failure to stand up to the energy companies and ensure that the full savings from wholesale cost falls are passed on to all consumers”.

But Labour’s position and plans have come under ferocious attack from their political rivals.

Ed Davey, Secretary of State for Energy and Climate Change said:

“Labour’s proposed regulations, involving wholesale-retail price links, would produce yo-yo pricing and higher pricing, and consumers do not want either.

“The exciting news is competition from smaller suppliers is now forcing big six to act. Last autumn, when the energy prices usually go up, they were frozen – without the need for regulation or Labour’s price freeze.

“I confidently predict that competition will force the other large energy firms to cut prices, or they will continue to lose customers in droves to competitors—that is competition.”

Letting the market work is a fairly predictable line for a Liberal minister to take but nonetheless it has a point.

David Cameron however was even more vociferous in his condemnation of Miliband’s latest folly saying:

“He cannot talk about unemployment, because it is coming down; he cannot talk about growth in the economy, because it is going up; he cannot talk about his energy price freeze, because it has turned into a total joke.”

Already Labour had backtracked on their much vaunted, and utterly unworkable “price freeze” by realising that markets go up and down and so hastily rebranded their freeze as a “cap” after belatedly recognising that customers would perhaps not be too pleased that Miliband had forced them to pay unnecessarily inflated prices because of his misguided intervention.

Indeed the FT reported that at PMQs last week: “Mr Miliband’s discomfort was illustrated by his decision not to raise the issue of energy prices at prime minister’s question time, even though Labour had a debate on the subject scheduled for an hour later.”

In a welcome moment of clarity however, following a very imprudent outburst from the Chancellor George Osborne last week, Ed Davey challenged his colleague’s call for intervention into the energy market saying:

“I’ve asked the chancellor to tell me a little bit more about what he’s planning and how it fits into the independent CMA investigation, which I regard as the premier investigation.

“I think British business, British industry and British investors would like politicians to think more strategically and think about the longer term, and if they interfere and meddle for short-term headlines, that is only going to damage markets and investment and our economy.”

Hear hear.

That doesn’t mean the energy suppliers should “get away with it”, it doesn’t mean the energy market is perfect, what it means is politicians should focus on resolving the issues of unnecessary subsidy, the taxation burden, an ageing network and investment disincentives and allow the market, indeed the people to decide.