Thursday, 24 October 2013

Energy Prices

So, as winter approaches, the main energy companies have kindly put up their prices by an average of 10%. That's nice of them.

This puts me in a very unusual position of being a proud capitalist, and yet finding the activities of companies operating in a market to be abhorrent. This implies a level of cognitive dissonance that is normally only reserved for Lefties when a few inconvenient facts are pointed out to them, which usually causes them to lose their temper.

And yet, I feel no such discomfort. Why?

I am a proud capitalist. The reason for this is evidence. All the evidence suggests that capitalism is the most successful,efficient and ultimately sustainable economic system ever devised. Its primary alternative - socialism, or communism in its extreme form - has failed every time it has been tried. Sometimes the results have been merely economically disastrous. Occasionally, it has entailed huge loss of life. This is the primary reason I am opposed to Leftist thought. Because it's usually wrong.

And yet, here we have energy companies ramping up prices at a time when people can least afford it. Labour tell us that this is justification that capitalism doesn't work. I disagree. Capitalism does work. However, the energy market is not an example of capitalism. It is an example of corporatism.

Capitalism is defined by companies operating in a minimally regulated environment, where there are very few barriers to market entry and trade. Customers are able to trade freely with whichever company they choose. Prices are transparent and easily comparable, allowing for competition between the market players which puts downward pressure on prices. The market has lots of players, and no single one holds a dominant position.

That's capitalism.

That is about as far removed from the energy market as it's possible to get, without actually nationalising it.

The energy market is dominated by only six major companies, which hold over 70% of the market share. Regulation and cost provide genuine barriers to market entry, making it very difficult for energy start-ups to get going. Customers face barriers to switching providers - companies won't accept them if they have outstanding bills to pay, and the switching process itself can be long and stressful. Prices are opaque and confusing, with different prices for different levels of consumption, standing charges and multiple tariffs. This makes it very difficult to conduct comparisons.

Let's face it - the energy market is a great big fucking mess.

Ed Miliband has recently suggested a cap on energy prices. This is not the answer. For all the energy market's faults, it is still a market, and still subject to the principles of supply and demand. The energy companies still have to import gas from overseas, and the unit price we pay is affected by that. Just because the State deems that energy is only worth a certain price, doesn't mean that it's actually worth that much. That's like the Pharaoh trying to control the waters of the Nile. It won't work, and eventually everyone winds up with wet feet.

That said, however wrong and misguided he might be, Miliband at least has a policy. Cameron seems to be pissing into the wind on this issue. So here's my proposals:

  • Toughen up the regulation. Either replace the existing regulator, Ofgem, or give it increased powers with a new remit to target anti-competitive behaviour and price opacity. Compel companies to provide a single composite unit price, so the amount people pay is directly linked to the amount they consume. This will also make price comparisons significantly easier;
  • Remove barriers to entry. Allow new companies to enter the market using micro-generation. Make it more attractive to build new power stations in the UK by reforming the planning framework. Reduce the paperwork and compliance burden, which only big companies have the economy of scale to handle. New blood means more competition;
  • Structural reform of the market. There's no sense in denying it - the big six energy firms are, in effect, a cartel. They've cornered the market and charge whatever they like. Break them up. Force them to divest assets and sell off chunks of their customer bank as separate listed companies, preferably to UK investors;
  • Supply side reform. Introduce statutory service standards and turnaround times for customers switching. Force energy companies to take on customers' bonds with other providers, up to £500. Introduce a maximum time limit for firms passing on their savings in the wholesale market to their customers. And roll back some of those green taxes, including VAT;
  • Windfall taxation. Build in statutory provision for windfall taxes. If, despite all the reforms, the energy companies still make bumper profits where the spread between wholesale and retail energy is beyond a certain margin, subject them to a windfall tax, which is ear-marked for reducing the rate of VAT applicable to energy.
That will actually deliver us an energy market which delivers the best outcomes for consumers. Like what markets are supposed to do, innit.