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17 October 2011

The political battle over energy prices heats up

Cameron and Huhne seek to act on rising energy prices following Miliband's intervention.

By George Eaton

Which issue are voters most concerned about? Crime? The NHS? Spending cuts? The answer is energy prices. A recent Populus poll (see below) found that 63 per cent of people are “very concerned” about electricity and gas prices, while 24 per cent are “somewhat concerned”. And with good reason. At a time when inflation (which is expected to hit a two-year high of 5 per cent this week) continues to outpace wage growth, the latest figures show that the average household has paid an extra £300 for energy over the last year.

With this in mind, Ed Miliband devoted a key section of his Labour conference speech to the subject, promising to “break the dominance of the big energy companies”. In yesterday’s Sunday Mirror he called for the “big six”, whose profit margins have risen from £15 per customer in June to £125 per customer, to translate higher profits into lower prices. It was smart populism of a kind expertly designed to appeal to “the squeezed middle”.

Aware of the political threat that Miliband poses, David Cameron has summoned the heads of the big six suppliers (who supply 99 per cent of energy) to a special summit in London. In a joint article previewing the summit on, Cameron and Chris Huhne echo the Labour leader’s words on falling living standards: “These price rises couldn’t come at a worse time for consumers who are already feeling the pinch from rising petrol prices and the cost of the weekly shop”.

So, to quote Lenin, what is to be done? In the short-term, the government is encouraging consumers to take up the offer of free home insulation (which can reduce bills by £100 a year) and to switch to direct debit payments. Huhne and Cameron’s piece also emphasises the coalition’s commitment to “the vital winter fuel payment and cold weather payments”. In other words, despite criticism that it is poorly-targeted, the Winter Fuel Allowance is here to stay.

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Elsewhere, parking their tanks on Miliband’s lawn, Huhne and Cameron vow to implement radical reform of the energy market. They echo his demand for suppliers to be forced to sell the power they generate to any retailier, allowing new players such as supermarkets and co-operatives to enter the market.

But in the long-term, as Huhne suggested on the Today programme this morning, the question is how we get off the “fossil fuel escalator”. Tory MPs never miss an opportunity to attack the government’s green measures for raising energy prices. But the truth is that just £20 of the £300 increase in bills has been caused by the UK’s renewable obligations. The bulk of the increase has been caused by the dramatic rise in the price of gas and other fossil fuels. The answer, Huhne suggested, was to develop our own sources of energy not just from renewables but also from nuclear (his past opposition to atomic energy now a distant memory).

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But so long as global energy prices continue to rise, the best any government can hope to do is to offer support at the margins. The unpalatable truth is that UK energy prices remain below the European average and have significantly further to rise. But the current political argument offers a preview of the debate that will define the next election: how to respond to falling living standards.