24 Oct 2013

(by Catherine Waddams) Yesterday the Prime Minister  as a response to the latest increases in energy prices. He promised an annual review of competition in the market and to “roll back some of the green regulations and charges that are pushing up bills”. While an enquiry by competition authorities should be welcomed, the proposed measures also raise some serious concerns.

First the good news: at last someone is suggesting that the competition authorities who have expertise in such enquiries should be the ones to decide whether there are competition issues in the energy market, or whether the rising prices are, as the companies claim, a result of rising world energy costs. This isn’t easy to disentangle in a sector with very volatile upstream costs, so it needs experts to examine the situation thoroughly to identify whether there are problems which mean this market isn’t working well. The Office of Fair Trading and the Competition Commission (from April their combined forces in the new Competition and markets Authority) are best positioned to come up with an answer which carefully considers the issues rather than responds emotionally with a short term suggestion to the challenges of rising energy prices. Research at CCP has confirmed that short term interventions, such as the non discrimination clauses, had the effect of reducing switching and driving up prices, rather than lowering them as had been intended. It is crucial to investigate whether there are underlying problems in the market, rather than provide a series of sticking plasters for the symptoms as they appear.

The bad news is that it is highly unusual and a matter of some concern that the government is deciding on which markets should be referred for such an enquiry. Many have called for such a referral over the past many years, and it would be good if such an inquiry had been started in the past, so we don’t have to wait now for the results. But it is very dangerous if governments decide which markets should be investigated. One of the great benefits and strengths of the UK competition regime is that it is independent of political parties which, as we have seen, have tended to provide short term solutions which often cause more problems than they solve. One reason this is important is that the companies have security against government interference so they can raise capital with lower risk and cost to consumers. If lenders expect the companies to be subject to repeated government intervention it will be consumers who pay for this in the long run.

And the ugly part of the announcement is the removal of environmental taxes. If we are to move to a low carbon economy as the British government has pledged, we need to confront the need for us all to recognise the cost to the environment of using carbon generated fuels. This raises the cost of energy, and discourages us from using it – and that is exactly the point. For those who cannot afford the increase because of low incomes, it is important to provide additional income and ensure they do not suffer additional hardship, but reducing the price of their energy does not give them (or others) the necessary messages about the damage that carbon burning imposes. We need to be clear about prices reflecting appropriate costs, and ensure that the additional revenue raised is used to compensate those who struggle because they are on low incomes – and so we can have a virtuous tax.

As in most of the discussion about the energy market, there are some good points and some bad ones in Cameron’s announcement – the challenge is to keep a cool head, consider the long term health of the industry and the immediate needs of vulnerable consumers, and to ensure that the baby is not thrown out with the bathwater.