Squaring the circle

Energy, or rather the size of energy bills, has become a hot topic for political parties. With an election looming they are now doing their best to use energy policy to win votes.

The timescales of saving the planet and winning the next General Election do not really match up though. The former requires a vast global shift in how we generate electricity, very costly, complex and requiring military like coordination. The latter requires quick vote pleasing fixes.

In March Labour government wannabes said it wants the energy regulator to use a proposed legal power to enforce an additional cut in annual fuel bills estimated to be worth £100 per household. This is on top of the promise to introduce an energy bill price cap, freezing bills until 2017.

If Labour wins the next General Election, it will give Ofgem a new legal duty to review energy prices by the autumn – and the power to order price reductions before the winter if it is shown that individual firms are not passing on cuts in wholesale prices.

As short term political fixes go that is all well and good. This is clearly a vote winning policy but only a handful of people understand the problems facing the energy market. Yes competition is good but the current market structure and the eunuch like potency of the regulator means the electricity bills are set by a tacit cartel that can do what it wants, when it wants without fear of new entry eroding market share.

The solution requires political courage – something that few seem to have. The recipe is to make the competitive market work while also meeting green and security aims. Something that is very tricky.

If you want to see a more competitive market then politicians  must do something about vertical integration ((VI) (where the same company owns the generation and supplier billing bits of a company).

Under VI it doesn’t matter if input prices, such as that for wholesale gas, go up or down As the big six companies are indifferent. They just charge their customers whatever they can and do whatever the next big six company does. There is an oligopoly and Ofgem is just not up to the job of being threatening and sending out the message that there will be consequences of any price rise, not least because doing so will require Ofgem to admit that it has failed in its duty to ensure that there is competition in the market.

One solution is for politicians to admit that things have gone wrong and then disassemble the big six into separate competing generation and supply companies. Then they would not be immune to wholesale price changes and there would be six competing suppliers seeking out the cheapest wholesale price they can get and competing with each other to retain customers. The same competitive principal goes for generation.

This is a very big ask and may derail green ambitions temporarily but the ultimate prize is out there. You can almost smell it. There is a question whether politicians have the foresight and the long sightedness necessary. What am I saying? Of course they have not at the moment but perhaps the next generation will have that foresight and the circle can be squared viz. saving the planet at least cost. Let’s hope so.

Dominic Maclaine is an EPG Associate and used to be the editor of New Power before he sold the business. He conducted PhD research into electricity supply competition in the UK and Norway at SPRU. He was previously the editor of the monthly newsletter Power UK published by Platts (and previously the Financial Times). He is currently writing a book about recent developments in the UK electricity market, to be published by Routledge.

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