Is freezing energy bills a good idea?

It’s conference season among Britain’s political parties. Most of us don’t much care, but it’s often where the new political ideas get their first airing. It’s currently Labour’s turn, and Ed Miliband secured himself some headlines today by announcing that if Labour won the election, they would freeze energy bills for two years.

It’s an eye-catching policy, one for the ‘squeezed’ middle classes seeing their spending power eroded by stagnating wages and rising living costs. But is it a good idea? Can it work?

There’s no doubt that Britain’s rising energy bills are a problem. Gas prices have doubled in the last decade. An increasing number of people are experiencing fuel poverty, officially defined as spending more than 10% of your income on energy. This is a real problem, and prices are likely to rise higher in future. However, it’s worth getting this price rise in perspective a little.

First, we still have cheaper energy prices than many parts of the world. Gas prices are almost half the EU average (see chart at the bottom of this post), so the popular notion of ‘rip-off Britain’ doesn’t apply in the energy market. Prices are rising, but they are coming closer into line with our neighbours, for reasons we shall come to.

Secondly, we enjoy cheaper bills now than we have done in the past. As a percentage of household expenditure, we used to spend around 5% on energy (not counting petrol) through the 60s and 70s. Prices began to fall in the mid 80s and dropped for 15 years. Energy accounted for 4.1% of our household spending in 2010, slightly higher today. So it’s not that we’ve suddenly gone into an age of expensive energy, it’s more that we’ve enjoyed a period of cheap energy.

household-energy-expenditur

Any guesses as to what might have caused that long dip in energy prices? A lot happens in the time shown here, including privatization of Britain’s energy network and the dash for gas. But it’s hard to escape the fact that gas bills reached their lowest around 1998 to 2001, right when North Sea gas production was at its peak. Gas prices start to rise sharply around 2004, which is right when North Sea production starts to drop away.

gasproduction2009

As domestic production has fallen, Britain has gone from being a net gas exporter to a net importer. We have become increasingly reliant on gas imports, mostly by pipeline from Norway and in liquid (LNG) form from Qatar. Demand for gas continues to rise globally, and so the price of wholesale gas rises, especially for LNG. This, fundamentally, is the reason why household bills in Britain are going up.

Now, let’s bring this back to Mr Miliband. “We need successful energy companies in Britain, we need them to invest in the future” he says. “But you need to get a fair deal.” In Miliband’s estimation, it’s the fault of the energy companies. “They have been overcharging people for too long”. So the government just legislates and tells them to freeze their prices. Cue applause.

Miliband’s idea ignores all of the above. It ignores the fact that gas prices are likely to continue to rise throughout his price freeze, meaning companies will have no choice but to immediately bring in one big price change at the end. It ignores the possibility of a price spike (which could be as simple as a cold winter) which would seriously affect company profits, and cut investment elsewhere to pay for it. Ironically, the bigger companies may be better equipped to ride out any loss in profits, so it could be smaller companies that suffer most from this idea, making the hold of the ‘big six’ energy companies even tighter.

If we really want to do something about the amount we’re spending on energy, there is a far simpler solution – use less energy in the first place. But I suppose people would rather hear that it’s the energy corporations’ fault for overcharging, rather than their own fault for not lagging their lofts.

10 Comments on “Is freezing energy bills a good idea?”

  1. Tegan Tallullah September 25, 2013 at 7:57 pm #

    Well said. I heard Ed Miliband talking about this price freeze on the radio the other day and I thought it was just something he was spouting to gain popularity – he might not even be able to follow through with the promise. Also as you say, it’s completely ignoring the background to the issue. A better policy would be to offer state funded house-insulation for those in fuel poverty, or even to reduce bills by upgrading the national grid to a smart grid that doesn’t waste 1/3 of electricity as thermal radiation!

    • Jeremy September 26, 2013 at 10:17 am #

      The offer of state-funded insulation for those in fuel poverty has been around for years in one form or another, some funded through local councils, some nationally. Take up has been very slow, partly because people don’t know about it, partly because many of those in fuel poverty are in rented accomodation, partly because people have too much stuff in their lofts and can’t be bothered (seriously – that is one of the main reasons people turn down the offer when presented it on the doorstep).

      The Lib-Dems had an idea to make people insulate their homes while carrying out other changes, but that was scuppered after opponents re-branded it into the ‘conservatory tax’.

      Discussion over forcing private landlords to guarantee minimum efficiency standards are ongoing. https://makewealthhistory.org/2010/10/25/ask-your-mp-to-improve-standards-for-rented-homes/

      As you say, it would have been great to see Miliband tackle some of these more realistic policies, rather than grabbing an attention-seeking and thoroughly unrealistic option.

  2. DevonChap September 25, 2013 at 8:45 pm #

    For once you are bang on the money. If you want to reduce the use of something you don’t cut its price! The other big problem a price freeze would cause is that it would starve the industry of money for investment, so if they invested at all it would be in options with cheaper capital costs – gas and coal, not wind or solar.

    Supposedly Ed Miliband was a great Environment Secretary with a real green sense. Looks like he’s happy to throw that away for some socialist populism.

    • Jeremy September 26, 2013 at 10:21 am #

      Yes, I haven’t even mentioned the implications for UK energy policy or climate targets, but they completely unravel under this scenario. I don’t know whether Miliband is aware of this or not. Really, it’s the most half-baked political idea I’ve heard in a long time, so it’s entirely possible that he isn’t.

  3. DevonChap September 25, 2013 at 8:48 pm #

    Good summary here

    http://www.liberumcapital.com/pdf/AbwjyzrV.pdf

    • Jeremy September 26, 2013 at 10:25 am #

      Quite right, and giving their share price a kicking isn’t going to get the utility companies on Miliband’s side either.

  4. imarunner2012 September 30, 2013 at 7:33 pm #

    Here in the US we are seeing oil and gas production surge due to fracking. We now have so much gas that they want to start exporting it, just like the UK did when they had a surplus.
    Exporting may be a great way to maximize profits, but it is a bad national energy policy. Exportnig will cause prices to rise which will encourage further drilling. All of this will accelorate the pace at which the US will also see a decline in oil and gas poduction and prices will start to rise further.
    Corporations act in their own interests, no the interests of any country, even the one they call home. I do not believe in nationalized businesses but the US needs a rational energy policy in order to sustain our “cheap” energy supplies.

    • DevonChap September 30, 2013 at 8:21 pm #

      Having an artificially low price because you don’t export the gas will see it over used because it is not worth being efficient with it. So more CO2 will be released than if you export the gas and prices rise to world levels.

      The US allowing its energy prices to rise to levels similar to the rest of the world would be a major step forward in controlling global CO2 emissions. Added to the fact that the US is an evangelist for free trade because it gets more put of trade than it would from protectionism. It would be a bad example to go against that and not even keep out imports but prevent exports.

      • imarunner2012 September 30, 2013 at 8:31 pm #

        I understand what you are saying.
        I just think the rapid development of this resource will lead to a rapid decline in it’s availability.
        In the US the move to green energy seems to be picking up steam. I see more homes w/ solar on the roof, smaller cars on the road and more electric cars.
        We have switched over to natural gas to make electricity because it is cheaper than oil or coal and this has helped ease electricity prices.
        Even with this moderation in price increases for electricity, LED and CFL lights are popular. Most people are probably looking to save money and not the environment, but their use of more efficient lighting, appliances etc has moderated the increase in use of electricity.
        Ultimately people are looking out for their wallet and becoming more efficient serves this purpose, regardless of the price of energy.

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  1. energy price freezeThe oil lamp – shining God's light on peak oil - September 27, 2013

    […] in line with this gas production. By the way an excellent background to this can be seen here at “Make Wealth History”.  However, since 2004 as gas production started to fall prices have risen.  In 2004 I was paying […]

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