Issue Number: 101   October 2013

Miliband Dreams of Freezing Energy

Is it possible or desirable to mandate an energy price freeze?

In this article, our new analyst, Nico Cottrell, considers the practicalities and implications of freezing energy prices.

At his party conference speech on Tuesday 24th September, Ed Miliband insisted that if the Labour Party is successful in the 2015 election, the new Government will freeze gas and electricity prices for twenty months. He anticipated the inevitable reactions of the energy firms; 'the companies aren't going to like this'. But he is convinced that because the companies 'have been overcharging people for too long', the time has come to press the magic button and 'reset the market'. He finished with the rhetorical refrain that permeated the rest of his speech: 'that's how Britain will do better than this.'

Miliband's proposal on the energy freeze, despite only consisting of two short paragraphs in his long speech, has provoked the biggest reaction, and he has since stood by his claims in an interview with the BBC. In a statement that brings to mind a child writing to Father Christmas for hopeful gifts, he said 'I've written a letter to [the energy companies] this morning…' [1] , and laid out the design of his dream.

His attack on energy prices undoubtedly strikes a chord with the feelings of consumers. Since 2001, gas bills have risen by 137% and electricity bills by 66% with the average household now paying an average of £1420 per year [2]. Labour claims that the energy price freeze would mean that average households would save £120 and businesses £1,800 every year, meanwhile this would cost the energy giants £4.5bn. Acting like a modern-day Robin Hood - who takes from the rich and gives to the poor - Miliband appears to mean well by this move to more greatly regulate the energy companies. There is also probably a less philanthropic motivation at work: more appealing policies will mean greater votes in the 2015 General Election.

This article explores some of the issues surrounding an 'energy freeze'. First, it will explore how a freeze on energy prices can be done; and second, explore the claims that the energy companies are simply profiteering; and third, imagines some of the short-term and long-term implications of a price freeze on energy.

An energy price freeze

Price freezes on energy are currently available to the consumer. First: Utility offers an iSave Fixed April 2015 price on energy that will cost the average homeowner £1170 over a year. The next cheapest deal is from npower, called the Online Price Fix November 2014 and costs £1,181 for the year. A longer-term deal can be found at Scottish Power which has a Fixed Price Energy January 2017 tariff that costs £1350 per year for the average household.

Fixing energy prices is therefore not a completely foreign territory for energy companies and the large companies already offer it. Offering fixed prices on energy requires a forecast of the energy market, so energy firms are not out of pocket if prices on the global market are likely to increase. Miliband's plans would mean that all energy companies would offer a fixed-rate deal; and there would be no alternative to this package. To cope with Miliband's plans, energy firms might increase their prices before the freeze. Energy companies would be obliged to seek out long-term contracts with suppliers so they could buy at a fixed rate, and buy less from the spot market where there is great competition from South America, the Middle East and Asia.

So, the price freeze idea is not as impossible as it sounds. But will the large energy firms be put off altogether and leave the country? Sir Roger Carr, the chairman at Centrica, has threatened this. However, it is unlikely that energy firms will follow through with their threats; they have huge, profitable, established businesses in the UK, and it is far more likely they will ride the storm and endure twenty months of possibly reduced profit, or find other ways of coping.

Predicting the shape of the future energy market is not easy and another possibility is that energy prices will actually drop in the future. This depends on the future of energy supply and demand, and in particular the availability of additional volumes of liquefied natural gas (LNG), which may or may not arrive in the UK, as the US starts significant LNG exports over the next two to three years. In the longer-term future, the UK may begin to tap into its shale gas reserves - though this is very unlikely to happen in this decade. There is the possibility that the amount of LNG on the global market will have substantially grown, thus pushing down gas prices. So, if the energy companies have fixed prices ahead it is entirely possible the companies may end up paying more for their energy compared to what is being offered on the market. They may have to think again about their forward buying, in order to avoid embittering consumers.

Profiteering energy companies?

But how mercenary have the energy firms actually been? Are our energy prices obscenely high? In reality, the UK's energy prices are actually lower than the European average. In terms of electricity costs, Britain has one of the lowest prices (see graph) [3]. If the energy bills still seem high, then it is likely that this is related to factors outside the energy firms' control. Analysts have suggested that the 'stealth taxes', which amounts to 10% to the energy bill, about £100 per year, ought to be axed and paid through taxation instead. It would have the benefit of not only cutting bills but also mean that the burden of paying would be shifted from those who can't afford to pay, to those who can.

Energy infrastructure and environmental sustainability - pressing concerns that require investment, not price control

A problem that Britain does face, however, is investment in its energy infrastructure. Freezing energy prices will could mean a freeze on investment on energy infrastructure; as Chief Executive Angela Knight at lobby Energy UK has said: 'It will… freeze the money to build and renew power stations' [4]. Right now, investment is particularly crucial because an estimated £110 billion is needed to replace Britain's ageing generating capacity. Most of Britain's nuclear power plants will be retired during the next decade, including the old coal-fired plants. Britain requires further investment in the replacement of these plants but possible investors are likely to be put off by Miliband's price control. This is a real worry. In the last week, Centrica scrapped two gas storage projects after the firm failed to gain public subsidies and it thought it was cheaper to take a £240m write-down than to continue with construction. Now the UK only has the capacity to store about three weeks' worth of gas, which equates to one-fifth of the storage capacity in Germany.

Another concern related to the future of energy infrastructure is its environmental sustainability. Miliband played an important role in 2008 Climate Change Act, which sought to reduce carbon emissions. But his proposal on freezing energy prices might jeopardize this Act. Energy firms could have less money to spend on ensuring that new plants will be up to date with the latest carbon-emission reducing technology. This is important because according to BP's recent statistical world review, the UK consumed 39.1 mtoe of coal in 2012, an increase of 24% on the previous year's figures [5], and must have contributed towards a 3.5% rise in UK greenhouse emissions [6]. Lord Smith, chairman of the Environment Agency, has warned that the heavy use of cheap coal is hindering the UK Government's attempt to tackle Climate Change [7]. Another consequence could also be a reduction of investment in wind farms and solar power, which would threaten Labour's renewable-energy targets for 2020 and greenhouse-gas emissions for 2030 [8]. Above all, Miliband's plan threatens companies' perceptions of the UK as an effective and liberalised energy market that has stable and sensible regulation, and thus future investment. It might drive away future investment from the UK energy market.

Conclusion

Miliband's energy plan is not as impossible as some might think; it can be done. However, the more important question is: should it be done? The most sensible answer is probably not. It runs the risk of scaring away investment and might have long-term repercussions on infrastructure and environmental sustainability. However, on a more optimistic note, Miliband's plan is not as ridiculous as some have claimed. Energy companies are not likely to abandon ship; the waters might be rocky, but they have survived in difficult situations before. If it happens, the energy companies will manage.

Imagine if Miliband comes to power and doesn't freeze energy prices. Promises turn out to be empty promises - that's a familiar story. Remember when Nick Clegg pledged not to raise tuition fees? That turned out well - fees ended-up tripling, much to the outrage of students… and parents. There was egg on Clegg's face and national embarrassment when he said on live television: 'There is no easy way to say this… We made a pledge, we did not stick to it'. The next day, there was spate of parodies including a musical remix on YouTube that emphasised the 'So sorry' part of the speech to great comic effect.

The video was so popular that the website's server crashed five times on the morning it was released. One question is, assuming Labour wins the 2015 General Election, will Milliband follow through with this plan? If he does not, there is bound to be consolation when YouTube pranksters turn Miliband's apology into a classic video on YouTube. At least the laughter will warm us up… that is, if we can afford to use the electricity for the computer.


[1] http://www.bbc.co.uk/news/uk-politics-24235688

[2] The Imbalance of Power, Which? July 2013, p. 3.

[3] Graph found at Labour's energy policy: Tilting at windmills', http://www.economist.com/news/britain/21586876-ed-milibands-proposals-cut-energy-bills-seem-likely-do-opposite-tilting-windmills

[4] Uk's Labour takes on utilities with price freeze plan', http://www.reuters.com/article/2013/09/24/britain-politics-energy-idUSL5N0HK34A20130924 (Accessed 26/9/13).

[5] See 'Return of the King', http://www.mjmenergy.com/MZINE/2013/july13art.html (Accessed 26/9/13).

[6] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/193414/280313_ghg _national_statistics_release_2012_provisional.pdf

[7] http://www.bbc.co.uk/news/science-environment-22711416

[8] See 'Labour's energy policy: Tilting at windmills', http://www.economist.com/news/britain/21586876-ed-milibands-proposals-cut-energy-bills-seem-likely-do-opposite-tilting-windmills


October 2013 MZINE