Don’t put monopolies before people

Industry should withstand a temporary freeze while much-needed reforms are carried out

When the leader of the UK’s opposition, Ed Miliband, announced his party’s plans to freeze energy prices for up to three years while a review of the industry is carried out, everyone from industry leaders to the OECD expressed their contempt for the proposed policy. Once again, they are putting the interest of monopolies ahead of those of the consumer.

Miliband is the latest European leader to throw his two cents into a debate that has been spreading across the continent. Over the past decade, energy prices across the region have been increasing at a much higher rate than wages. Part of the problem is that green energy levies for infrastructure investment are being passed on to consumers. It is undeniable that the current system is not functioning properly. Passing investment costs to consumers in order to protect profits is not a sustainable way of doing business. It’s downright immoral.

Germany has been fiercely debating a cap on energy bills since 2012. Costs for the promotion of green energy have been passed on to consumers, leading to astronomical rises in energy tariffs. Politicians have proposed caps on subsidies for renewable energy in the hope they will curtail the rise in bills. This proposal, though much more problematic than Miliband’s, has not been so widely mocked in the media. Germany might be sacrificing a progressive environmental policy in order to protect the bottom lines of German businesses.

In the UK, green levies have already been cut from energy bills – a bigger mistake by far than a limited price-cap. By curbing investments made in sustainable energy, the UK and Germany are crippling the future of the industry. Those costs should never have been passed on to consumers in the first place. It is the responsibility of the companies operating in a market to invest in infrastructure, and the responsibility of the government to ensure the appropriate investments are made through subsidies – or at the companies’ expense.

To compare the proposed caps to the disastrous economic policy that wreaked havoc with the economy of California 15 years ago, as some will do, is similarly underhanded. There, sale prices were capped at less than what it cost to produce the energy, causing losses from the outset while failing to encourage consumers to conserve energy. Though only the UK has outlined plans for a cap, it is unlikely other European leaders will make California’s mistake. It is possible to introduce a cap while still allowing distributors to make a profit. This will allow them to continue to operate, but with more limited returns for a time.

Electricity and gas are not luxuries. People need to heat their homes in the winter and businesses need to operate. OECD Secretary General Ángel Gurría told the BBC’s Panorama that a freeze could cause investors to go bankrupt, but doing nothing is making households go under every day. Gurría’s argument is disingenuous and manipulative.

The policy clearly states prices will only be frozen for a maximum of three years while appropriate regulations are revised. These will shield consumers from international energy price fluctuations and ensure responsible investments are being made to protect the sector’s long-term sustainability. Though the freeze will harm profits in the short term, it should buy regulators time to fix a market that has too long been tilted in favour of energy monopolies, to the detriment of the consumer.

Caps are populist, naïve and dangerous

Caps on energy prices may be popular with the public, but they could prove fatal to some businesses 

As a piece of populist, bandwagon-jumping politics, calls for a price cap on energy prices are a brilliant way of capturing the mood of the nation. As an actual, serious policy, it is barmy, absurdly out-dated and frankly downright dangerous.

Recent proposals by the opposition in the UK have stoked debate across Europe about whether caps should be introduced to help households suffering from the effects of the economic crisis. However, the UK’s energy market is rare in that it has a number of players fiercely competing for business.

While prices have become quite high for consumers, the suggestion that a cap should be placed on what consumers are charged for energy is a ludicrous notion that shows just how divorced from reality some politicians are. Just because household incomes are constrained doesn’t mean prices should be made artificially low.

While energy price caps are used in some regions – notably throughout Europe – competitive markets should allow for lower prices for consumers and better provision. Caps on markets, specifically ones as tumultuous as those linked to commodities, are the sorts of policies that curry short-term favour with a disgruntled public, but in the long-term can lead to seriously damaging consequences. Companies could collapse under the pressure of wildly fluctuating prices, resulting in shutdowns in prices for regions that badly need it.

In 2000, California experienced mass shortages of energy due to capped prices. Consumers were discouraged from practising conservation and instead demanded huge amounts of energy because of the artificially low prices. In turn, energy providers chose to ration electricity supply instead of expanding production, which then led to market manipulation. The most notable culprit was Enron, which helped create an artificial scarcity of energy to then ramp up prices. These actions crushed a number of providers that were unable to pass on the costs to the consumers because of the state’s cap.

Germany also tried to install price caps on energy in 2012, partly as a result of the overly generous subsidies given to the renewable energy sector and the phasing out of nuclear energy in 2011. The country has the second-highest subsidies in Europe.

Studies show that energy prices in the UK, compared to its European neighbours, are in fact relatively low. Average bills are around €1,550, whereas in France and Germany they are €2,500 and €3,200 respectively. It is thanks to the high number of operators in the UK that the country is the third-cheapest in Europe for electricity and gas prices combined.

A major political disaster in a region that provides the world with energy could lead to a rapid jump in prices that companies would not be able to pass onto consumers, seriously damaging their revenues. With the Middle East showing no sign of stabilising any time soon, it would be foolish to promise consumers that energy prices will remain below a certain level.

Energy prices might seem high as household budgets are more constrained than they have been for years, but these are the realities of a volatile market, as well as the aftermath of one of the worst global economic crises in a century. People would do well to make more of an effort to conserve their energy use, rather than wail about the high cost of powering all their gadgets and heating their homes.