Ed Miliband’s pledge yesterday, to freeze energy prices until 2017 while reforming the market, appears to have plucked a rather sensitive chord. The reaction is, to a large extent, par for the course. Nobody truly expected the energy industry or right-wing press to welcome these developments. The knee-jerk reaction has been predictably swift and forceful. In my years working for a regulator, I can scarcely remember an industry representative faced with any kind of intervention who has not claimed that this would immediately bring about the end of their industry and civilisation as we know it.
The initial reaction from commentators was that Miliband has proven he does not understand how free markets work, followed by a number of irrelevant comparisons with inappropriate markets. All this has served to prove, is that the commentators in question don’t understand how a free market works or, indeed, what one looks like.
Energy supply in the UK is not just any market and it is as far away from a “free” market as one could get, skewed as it is by a long list of factors. Forgive the boring economic bit – I will attempt to make it as brief and simple as I can. Skip, if you must.
The market is an oligopoly (controlled by very few giant players). It is vertically integrated (the same companies which sell us energy at the retail level, largely sell it to themselves at wholesale level). There are significant barriers to entry (the costs and difficulty of setting up an energy company to compete are massive). There are asymmetries of information and barriers to switching at consumer level (because of a proliferation of tariffs, schemes and guarantees it is difficult to glean the cheapest supplier and, even if one does, switching is not easy). The aggregate retail market for energy is an essential commodity with very few realistic alternatives (it’s not like we could stop consuming the stuff or switch to burning government white papers for heat and light). In short, if an economics professor were trying to give an example of a market with the potential to be dysfunctional and require state regulation, energy would not be far from the top of the list.
Next, came the “poor energy companies making no money, really” defence. It was spearheaded by Angela Knight, the former Conservative MP who represented investment managers and stockbrokers during the decade of that industry’s worst excesses, was in charge of defending the British Bankers’ Association during the financial crisis, and assured the nation in 2008 that Libor was “a reliable benchmark”. She made much of the fact that almost half of the energy retail price can be accounted for by the wholesale price, while dishonestly obscuring the fact that it is largely the very same companies that set and profit from the wholesale price.
Finally, the most desperate and starkest of warnings: “the lights will go out”. What about the Californian energy shortages and blackouts, asked Andrew Neil on the Daily Politics? I don’t know whether this comparison was cynical or ill-informed. The “California Electricity Crisis” was not the result of regulation, but a process of deregulation which started in 2000-01. What is more, it has since been shown to have hinged on unlawful manipulation of supply by disgraced energy giant Enron. If ever there was a compelling example in favour of the tightest regulation of energy markets, it is this precise instance.
Centrica, a company which announced a near 10 per cent rise in its profit this year while simultaneously issuing a price rise warning, has threatened to quit the UK altogether over this perceived outrage. Other energy companies have made similar noises. And yet, “the big six” operate in a multitude of countries where degrees of price regulation, in many cases much harsher and more permanent than what is being proposed here, are in effect. As a matter of fact, only nine of the twenty-seven EU member states do not exercise some form of price regulation of energy retail prices, much to the chagrin of the European Commission.
One of the biggest players, Électricité de France or EDF to you and me, is owned by the French state and provides electricity to its French customers at heavily regulated and considerably lower prices than its British ones. Britain has one of the highest rates of energy inflation in both the EU and the OECD and has done for many years. Amid significant and evidenced allegations of “ripping off” and “market rigging” how can anyone support the notion that government just needs to step out of the way and let markets do their magic? Households today spend double the proportion of their income on energy bills than they did a mere eight years ago.
The counterargument, that energy companies will simply hike prices before the election, is naïve. Politically, they are pretty snookered. A hike before May 2015 would make this even more of an election issue – perhaps a transformative one. Helping install a Labour government is the very last thing these conglomerates would want right now. Not to mention that it may force Cameron into a similar pledge. The idea that they will put up prices immediately after the freeze is similarly misconceived; ignoring, as it does, that the reason for it is to facilitate deeper market reform by 2017.
At its heart, this hysteria over the Labour leader’s pledge betrays an evangelical belief in free markets self-correcting, whatever the cost; the very same misplaced faith which meant few predicted the global financial crisis. We continue to anthropomorphosise – markets are nervous, markets are jittery, markets are pleased, markets are calm – sacrificing figurative goats to appease volcanoes. Forgetting all the while, that these artificial constructs – markets, companies, banking, lending, money – were put in place to facilitate our existence, not the other way around. When they cease to enhance the lives of the vast majority, it is time to go back to the drawing board.
“The lights will go out,” we are warned. The single pertinent fact, which seems to have escaped every single detractor, is that the lights are already going out for the 4.5 million households living in fuel poverty in the UK, right now. Reform is not only desirable, but absolutely essential.