Let’s not get too carried away by talk of an energy price freeze
The Labour leader Ed Miliband has promised to freeze gas and electricity prices if they get into power - but will it really happen?
Was anybody really surprised by Ed Miliband's pledge to freeze energy prices at the Labour Party Conference yesterday? This is fertile ground for political one-upmanship and has been ever since energy prices started rising dramatically back in 2008. Was it a coincidence that reports that British Gas were about to raise prices by 10% surfaced in the papers on the weekend before the party conference? Or was this part of a game to bring energy prices back on to the press agenda?
Who knows. One thing is almost certain, though - British Gas and all the other 'Big Six' energy companies will raise their prices again and an announcement will probably come very soon after the noise from the party conference season dies down. (This isn't inside information, it's just a widely-shared prediction based on recent trends.) So, Miliband's promise will be fresh in the memory when the price hikes happen. Perhaps it will linger long enough to sway the British public into a Labour vote when they take to the polls in 2015.
That's the plan, anyway. But if all goes well Miliband will need to make good on his pledge. Political parties' historical track record of doing that is - how should I put this? - a little murky.
Keeping a promise
So how realistic a proposition is it? Can it really happen? Could it really lead to black outs, job losses, economic decline, as various prominent spokespeople for the major energy companies have variously claimed?
And what does a price freeze actually mean? Will everyone's prices stay exactly as they are the moment the legislation is pushed through? So does that mean Britain's households and businesses will stay on a wide range of unit prices and daily standing charges, with some paying significantly more than others because they do not engage with the market?
And what about the consumers who have had the foresight and proactivity to fix their prices for a number of years, taking a slight hit on the unit rate but managing their budget more effectively and protecting themselves against the inevitable?
As any meteorologist or gardener will tell you, with every freeze comes a thaw. What happens in 2017, when the shackles on the Big Six energy companies are taken off? Is there an increase in bills so extreme that businesses go bust and families go hungry?
The range of prices paid by Britain's businesses is even wider because they are all on fixed contracts. If a business owner allows a contract to expire without negotiating a new one, he or she can end up paying a unit rate and standing charge of up to 30% more. Or what if the company is on an out-of-contract rate, typically 20p per unit against an optimum rate of 10p? This often happens if they take their eye of the ball when they're new to a business premises. Is there no going back once the price freeze happens? Can that business person not take action to get to their rate as low as possible?
The admin is tricky, to say the least.
And as any meteorologist or gardener will tell you, with every freeze comes a thaw. What happens in 2017, when the shackles on the Big Six energy companies are taken off? Does the market go into a frenzy? Is there an increase in bills so extreme that businesses go bust and families go hungry?
Maybe Miliband is hoping the energy companies will volunteer a price cap. Well, their PR machines are already in overdrive and you can be sure they won't take the news lying down. They know the looming generation crunch will lead to an increase in wholesale electricity prices and, operating in a free market just like any other big business, they don't have a history of altruism. Don't expect shareholders to willingly accept any kind of hit. We may be predicting a price rise of 8 to 10 per cent in the coming weeks - but perhaps it will be more now. Or maybe there will be a hideous increase just before the price freeze comes into effect. Who will be the villain in those circumstances - Ed Miliband or British Gas?
It's great that Miliband is promising to take action on an issue that the British public feels angry about - but I hope he is prepared for the difficult questions and challenges ahead, particularly if he makes it to power.
Just a final thought.
Energy companies, said Miliband, have been 'overcharging people for too long because of a market that doesn't work'. Hard to disagree, but is a price freeze really the answer? A less headline-grabbing but more practical message would perhaps have been to encourage Britain's households and business owners to engage with this broken market a little bit more - because inertia is a huge part of the pricing problem. There are many, many suppliers other than the 'Big Six' out there, and competition stimulates a market place like nothing else. Consumers tend to win where there are lots of companies vying to win and retain their business.
Image credit: Johan Hansson