4 thoughts on “Price freezes and price caps won’t work: we need a competitive energy market”

  1. Posted 14/01/2015 at 15:31 | Permalink

    Some additional aspects not covered by this article:

    OFGEM is now prohibited by law from criticising the cost consequences of green energy policies (see Miliband’s 2010 Energy Act, which requires it to presume that green policy is always in the consumer interest). In practice OFGEM have interpreted this to mean that they should try to obfuscate green costs as much as possible.

    OFGEM has long benchmarked the industry on a presumption of 18 months of forward hedging (a basis that helps greatly with obfuscating real costs):

    https://www.ofgem.gov.uk/gas/retail-market/monitoring-data-and-statistics/understanding-energy-prices-great-britain/supply-market-indicator

    Therefore any call to reduce prices in line with recent precipitate falls ignores the reality of the benchmark, which energy companies cluster to so that their costs are not out of line with it. In effect, OFGEM is already mandating price freezes as the norm: Miliband’s call simply extended that from 18 months forward in September 2013 (i.e. just before the election this year) by a further 21 months. Since a) it was possible that the government would jump on the bandwagon and call for a freeze then, and b) it looked very likely that Miliband would win the election, energy companies duly went out and bought additional longer term hedges at great expense, and now face losses on them. The extra demand in hedging markets forced prices to be higher than they otherwise would have been (and has exacerbated the subsequent fall, as the demand is no longer there).

    Hedging can be expected to have a cost – especially where the market participants providing the hedges know that the demand for price insurance is effectively baked in by regulation. Miliband’s latest proposal for a price cap has a substantial cost. A ballpark estimate for a two year strip of price caps at the money is of the order of 10% premium to market prices. It is a scandal that he is allowed to suggest this without discussing the cost. He should be arraigned before the FCA for providing investment advice while not qualified to do so.

  2. Posted 14/01/2015 at 19:20 | Permalink

    I agree that Miliband’s proposed price freeze is foolish but I believe that he proposed a 20 month freeze, not two years as this article states.

  3. Posted 14/01/2015 at 23:28 | Permalink

    @HJ:

    Miliband’s proposal was made in September 2013 for a freeze through until 2017. For energy companies, their fear was that Davy would jump on the bandwagon, so in effect the freeze has been since the announcement. In any event, as I point out above, energy companies are encouraged to freeze prices 18 months forward already by OFGEM’s benchmark. Even if you price it as a delayed start call option (which might be exercised were Labour to win in May) the cost is very significant and has to be paid by consumers – all thanks to Miliband’s unthinking mouth.

  4. Posted 15/01/2015 at 15:22 | Permalink

    When the government interferes in markets, one effect is to add political uncertainty to market uncertainty. In several ‘developed’ countries there is currently a lack of confidence, which is not helping their economies. To add the prospect of arbitrary and unpredictable political intervention, very likely with undesirable consequences, may well reduce confidence still further. Having said that, one of the ‘problems’ in the UK energy market seems to be the approach of the end of the economic lives of several nuclear plants, with not much provision for their replacement in the near future, thanks to the LACK of government action by the last government, when Ed Miliband was Secretary of State for Energy.

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