Power 2020: kick-starting Britain’s energy revolution – Policy Forum 1

Labour price freeze announcement “disastrous”, MP warns

Labour price freeze announcement “disastrous”, MP warns

Energy and climate change select committee chair Tim Yeo has criticised the timing of Labour’s confirmation that it would freeze energy prices, if elected in 2015.

Yeo was speaking on 4 March during the first in the series of Power 2020 roundtable forums, which is examining various aspects of future energy policy. He acknowledged that Labour’s proposal had a lot of “superficial attractions” and that a “case could be made for it”, given the growing challenge of fuel poverty and the risks posed to businesses by rising energy costs. But he argued that Labour’s decision to announce the policy 18 months in advance of the election had had “disastrous consequences”, and undermined any potential advantages that it could offer. Yeo said that, even if Labour were not to be elected in 2015, the announcement would now ensure that energy prices increased faster than would otherwise have been the case in the intervening period. “There’s every incentive if you’re running an energy business to force your prices up before the freeze comes down and hits you”, Yeo suggested. “So the actual consequence of the freeze […] is actually rather perverse.”

Yeo further linked the impact of the announcement to growing concerns around the UK’s capacity margins in the coming years. While suggesting that the threat of blackouts should not be overplayed, he said that plans for a price freeze would discourage investment at an important time. He asked: “Why would you invest in a country where you’re told prices are about to be frozen, but you as the supplier may have to absorb rises in the wholesale price and your margin will either be reduced or removed altogether?”

Yeo said it would have been preferable for Labour to have provided much shorter notice of its intention to freeze prices. “When [then chancellor] Gordon Brown gave the monetary policy committee independence in 1997 to set interest rates he didn’t announce that in advance; he announced it two days after the General Election. That was a brilliant coup and that would in my view be a responsible way to say we’re going to address energy price rises.” But Yeo accepted that this was unrealistic as it would deprive Labour of any political bonus.

Shadow energy minister Tom Greatrex defended the advance notice of Labour’s intention, saying that investors prioritised long-term clarity about the direction of policy. He said Labour’s ongoing consultation on its energy market reform proposals would ensure that by the time of the election the mechanisms would be both well-understood and well-developed. But he also highlighted the fact that, in order to provide reassurance for investors, Labour had been clear in its support for contracts for difference and the capacity market, and that it remained committed to the establishment of a 2030 decarbonisation target for the power sector.

Greatrex was asked about the impact on the price freeze of a sharp increase in wholesale costs. He said that such issues would be evaluated nearer to the point of implementation, but he noted that energy companies hedged their position to cope with unforeseen events. He said: “The mechanism that would be used to introduce the price freeze would come in very early in the next government and we’ll obviously look at what the situation is at that point––but the intention is still to have a price freeze.”

uSwitch’s Ann Robinson said she believed that many smaller suppliers, who had significantly improved competition in retail energy markets, would be unable to survive a price freeze. “They haven’t got the big cash balances and they tend to buy more of their energy in the shorter term”, she argued. This combination of factors could, Robinson explained, be highly problematic during a price freeze if events such as the recent tensions in Ukraine produced a sharp increase in wholesale prices. Robinson said that the independent suppliers were offering some of the best deals, and argued it would be an “absolute disaster” if they were no longer able to operate in the market. She said that government interventions needed to focus on measures that would improve competition.

The next forum in the series, which will be held in May, will focus on skills and innovation in the energy sector.

The forum re-affirmed the sheer diversity of stakeholder concerns about the freeze. None of these will be assuaged until Labour fleshes out precisely how it intends this mechanism to work.

This article is courtesy of Cornwall Energy, and features in their Energy spectrum publication. For more details please visit www.cornwallenergy.com/energy-spectrum.