Ed Miliband’s pledge last week that a Labour government would press ahead with the party’s energy price freeze ‘within months’ may prove popular with the electorate. But my time as former Special Advisor to the European Energy Commissioner taught me that the distortionary effects of such policies will more than outweigh any short-lived gains for consumers. Energy price ceilings have already been proven failures in Spain, Portugal and Greece.
Just as with Labour’s proposals, the energy price ceilings in those countries were intended to be temporary solutions whilst wider reforms were enforced. But subsequent governments failed to lift the caps for fear of an electoral backlash since consumers would, at least in the short term, pay more without it. Lifting any ‘temporary’ UK price freeze or cap would likewise prove to be far more challenging than many politicians anticipate.
And of course if wholesale prices are lower than predicted, a price freeze would mean that those lower prices would not be passed onto consumers (hence the subtle shift from a ‘freeze’ to a ‘ceiling’ recently). On the flip side if oil prices rise considerably during the next government’s term and wholesale prices increase, the sector might operate at a loss, which could well lead to the government covering the shortfall in one way or another. That would effectively mean taxpayers picking up the tab, and paying the higher prices a prize freeze has supposedly prevented. At least, this is exactly what happened in Spain. Whenever retail prices fail to reflect production costs, it ultimately always leads to consumers paying more, if not in their role as energy consumers, then in their role of taxpayers.
Unfortunately, energy price regulation is a proven Europe-wide problem; so much so that in 2011 the European Commission formally requested Italy, Poland and Romania to end their ‘end user price regulation’ due to the policy’s risks and side-effects.
What the British energy industry needs is genuine transparency and competition. And one of the reasons it can be so hard for Westminster parties to achieve this is because of the polarised approaches to regulating energy that reflects, as elsewhere in Europe, an evolving tension between those who defend the status quo and those who advocate interventionist policies that the British energy industry has long been at the centre of. A more measured approach is desperately needed to address the problem of an energy industry that fundamentally fails to operate according to healthy market forces.
This is why Labour’s other policy of having open pools for wholesale trading and ring-fencing the generation and retail energy sectors could go some way towards improving transparency around how big energy companies sell power to themselves, but it must be done without the distorting effects of a price freeze.
More broadly, reforms must promote energy innovation that boosts consumer choice and leads to competitive consumer alternatives in a more decentralised energy model. Indeed the focus of industry reform should be on deregulation to allow the energy sector to decentralize and allow for the emergence of an ‘off-the grid economy’; a phenomenon that would relieve pressure from the central grid and empower those that consume energy to also play a part in producing it. Having such a model operate in parallel to the national energy grid would employ healthy market forces to loosen the grip of wholesale power companies over energy production; a far more effective long-term approach then price distorting policies. By comparison, a state-imposed price freeze or price cap will only strangle the industry from competition and accountability. It risks repetaing the failures of the past, when energy was a nationalised and politicised industry.
Vicente Lopez-Ibor Mayor is former Commissioner of Spain’s National Energy Commission, former Special Advisor of the European Energy Commissioner, and chairman of a global energy law firm.