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.
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.
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.