Mr Miliband’s proposals to freeze energy prices for homes and businesses for twenty months if Labour is elected, to replace Ofgem with a ‘tougher’ regulator and perhaps to break up the big energy companies are merely the latest in a series of misguided ideas that are leading back to centralised planning of the energy sector.
As explained in the October issue of Economic Affairs, the origin of these ideas lies in the final years of the last Labour administration when, influenced principally by an apparent consensus in the scientific and economics establishments about future climate change and its dire consequences, government began once again to intrude, as it had done under nationalisation, into major energy investment decisions. In particular, it reverted to a regime, unsuccessful under state ownership, of interfering in electricity generators’ choices of which fuels to use. In a policy subsequently followed and indeed reinforced by the present coalition, it promoted ‘renewable’ forms of energy such as wind and biomass and subsidised energy ‘conservation’. Support for a new nuclear power programme may soon be on the way as well. In sum, energy companies have in recent years been instructed by governments of all major parties to use more expensive fuels than they would freely have chosen and consumers have had to bear the (considerable) costs.
Further upward pressure on energy prices has occurred because the liberalised UK energy market, completed around the turn of the century long after privatisation, could not co-exist with such a degree of government intervention. It has been replaced by a market highly regulated from the centre. Whatever one thinks of the prospects of damaging climate change, it is clear that this government, following its predecessor, has chosen the worst possible approach: in a very uncertain situation the last thing required is Soviet-style central planning with its attendant rigid state-sponsored investment programmes.
Mr Miliband’s proposals stand out as particularly crude and irrelevant measures, which do nothing to address the principal upward pressures on prices. Why price controls should have been announced is difficult to understand since his advisers must be aware of the long history of failed attempts to apply such controls by politicians unaware of the functions of the price mechanism, of the potentially severe unintended consequences, especially for the supply of energy, and of the possibility of pre-emptive action by energy companies before the proposals could come into effect. As for Mr Miliband’s plan to abolish Ofgem, the regulator has hardly distinguished itself since it gave up trying to promote competition and settled instead for acting as the government’s agent in the energy market. However, abolition is not the answer. There is a place for some energy market regulation, for instance of the networks, but it needs to be tempered by vigorous promotion of competition so that energy companies do not believe, as they do now, that they can raise prices secure in the knowledge that their ‘competitors’ will follow.
A fundamental problem in UK energy is that the coalition and the previous government have raised energy prices both directly by promoting uneconomic forms of energy, and indirectly by suppressing competition, substituting a highly regulated, centrally controlled energy market for the previous liberalised regime. Mr Miliband has seen only the symptoms of this failed approach and, like price fixers before him, would make matters worse if his ideas were ever applied. All the major parties should seek the underlying causes of the malaise in the energy market. The model is there to see. Anyone who really wants to protect consumers would reinstitute a competitive energy market rather than try to fix prices and impose yet more central regulation.
Update (December 2013): Colin Robinson explores these issues in more detail in From Nationalisation to State Control – The Return of Centralised Energy Planning.