Can Parliament control energy prices?

Can Parliament control energy prices?

Parliament’s role has been gradually changing over the years. It still makes laws, but most of the laws it makes are “whipped” by the government onto the statute book; Members of the House of Commons are dependent upon their parties – Harold Wilson once famously threatened the “take away their dog licences” when challenged by dissenters. That means that the real work of Parliament is now done in committees which examine what is going on and sometimes make very valuable recommendations which should be given wider publicity and more credence than they are.

One committee, the Business & Enterprise Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department for Business, Enterprise and Regulatory Reform. For nearly six months it has been looking at energy prices, and has worked so that its work would be complimentary to the inquiry by the energy regulator Ofgem into energy markets. The Committee’s work has been concluded and the report makes interesting reading. The Committee understands the issues – trying to keep energy prices low in a competitive market which comprises in effect just six active suppliers.

They found no evidence of price fixing collusion between the big six energy suppliers, but that is not surprising. When the market is dominant by six suppliers they do not need to collude; they simply need to follow the market trend; they can do this by observation without the need to send a secret email or arrange a quick meeting at a service station somewhere on the M6.

The committee pointed out that industrial consumers of energy pay more for their energy than their European Competitors, which is a good reason not to open a factory that uses energy in the UK and a very good reason to open one elsewhere in Europe. One of the largest users of industrial gas buys it in Europe and ship it to the UK for the plant. Smaller users cannot do this. Is this the way the market is supposed to work?

Unfortunately it is also a good reason to move an existing plant out of the United Kingdom; this will be bad news for our economy. They point out that the regulator, Ofgem, sees “no clear evidence that the market is failing” and the Committee hopes that the regulator is right, but I suspect that the regulator is blind. The energy markets are failing industry in the same way that they are failing those in fuel poverty.

The Committee does not put things quite as bluntly as I have; having seen the evidence they believe that the “functioning of the wholesale markets for both gas and electricity, which was a cause of deep concern to the Committee, and emphasises the magnitude and importance of Ofgem’s task” that is to say Ofgem’s probe into the energy markets.

In the UK gas market the Committee found it hard to understand exactly who was paying what and when they were paying it for wholesale gas prices. They called this murky area troubling and pointed out that if you could not understand wholesale prices how could a regulator know whether the prices being charged by the energy companies were fair? It hinted at a lack of transparency in the wholesale gas market and urged the regulator to investigate why gas producers were reluctant to trade gas forward. It suggested that such reluctance may be a matter for investigation by the Competition authorities.

It pointed out that we have almost no storage capacity for gas here (something I have already commented upon) and so in winter when we produce excess gas we sell it to Europe at rock bottom prices. Europe stores plenty of gas and we buy gas back from Europe when we need more of it in winter at top prices. If you ran a business like this in the real world you would soon go bust, because in effect you are subsidising your competitors, but the UK energy market does not really operate in the real business world because there are six suppliers for a commodity that everyone needs and those suppliers are driven by profits, not by the welfare of the country.

The Committee recommends increased efforts to liberalise the European energy markets by negotiations at the European Commission. Here I simply make two points; other European countries will not be as foolish as the UK and divest control over energy in a world where fuel is becoming and will become in increasing short supply. In addition, even if the European Union agreed to liberalise energy markets that process would take five years or more; do we have the time?

The Committee manfully tried to find out what were the values of the benefits of the free Emissions Trading Certificates that the big six energy suppliers received as a taxpayers’ donation. They were unable to discover this and wondered whether this did constitute a windfall, as many energy commentators suspect.

The Committee also covered other issues such as the way the market seems to conspire against new investment in generating and transmission capacity and the problem of fuel poverty and the associated need for “social” tariffs and smart metering. In many ways the report is a critique of the fundamental structure of how we deliver our energy. I do not think that structure can be fixed. Parliament will be now not just checking on the energy companies but also on the regulator; the energy companies have to be loyal to their shareholders. The regulator cannot step outside his mandate. The whole thing is a mess.

Can Parliament control energy prices? The trouble is that get to the right place you would not start from where we are now.

 

9 Responses

  1. […] Prices News » News News Can Parliament control energy prices?2008-07-29 01:51:12World as the UK and will not be as the European … divest control over energy in […]

  2. Question, is there any financial benefit for the government to lower fuel prices?

    I would’ve thought that the Big 6 overall control the prices between them, influenced (to whatever degree) by the government when needed

  3. I think so.

    They effect on taxation is minimal; energy taxes from consumers comprise 5% VAT, so there will be a loss of tax take. On industrial users the climate change levy is also geared to price.
    On the other hand if energy prices are lower it makes our manufacturing industry more competitove which should increase their profits and increase the tax take from corporation taxes and income taxes as manufacturers employ more people.
    What worries all governments is if they have high energy prices while the nations with whom they compete have low prices. It is a formual for decline.
    Robert

  4. These energy prices have become unaffordable and no one seems to be able to do anything about it. Our energy supplies are now in the hands of foreign companies who have no interest whatsoever in building storage facilities in this country as this would prevent them selling gas to us at inflated prices in the winter. There is however a solution which has occurred to me which will be painful on both sides,but will at least make these evil fuel profiteers sit up and take notice, namely, contact your supplier and tell them that you can no longer afford these prices and wish to have your gas supply terminated. Lack of gas usage will quickly overwhelm their storage capabilities and require them to reduce the price to increase demand, or else they will have to stop buying it which should have the same effect. We have to do something otherwise we are sunk!

  5. Robin

    An interestig idea – civil protest with yur pocket. I think we’d have hard job to ersuade enough people to join in, though.

    Robert

  6. I found your site on technorati and read a few of your other posts. Keep up the good work. I just added your RSS feed to my Google News Reader. Looking forward to reading more from you down the road!

  7. […] There is no doubt that the energy companies have taken advantage of the current turmoil to increase their profits and therefore the dividend payments received by their shareholders. The government must provide the regulator with teeth, in order that the regulator can control and approve energy increases. If the regulator is not in place to keep a handle on such matters, then what is it there for? [Can Parliament control Energy Prices] […]

  8. I wanted to respond to Robin’s comment regarding having our service cut off completely which is ironically my next step. Like many others I too am a victim of fuel poverty and recently visited my local labour mp to ask for assistance. The response I recieved was disheartening to say the least. I was told what do you want me to do about it and to watch out for the up and coming budget. I wanted like any other constiuent the government to put pressure on the energy companies to lower their prices and at the same time reduce the amount (if not abolish) of VAT we pay on fuel. After all what are the mps there for if not to work on behalf of the voter. I was also suprised to learn that Mr Love did not know what the rate of VAT was on fuel (which is alarming) considering he will be asking for my vote once again during the next election. It seems our only choice is to stop paying for these services and it is something I am prepared to do. I am also urging others to follow suit and join me in my campaign against extortionate energy prices. We shall name it the can’t pay won’t pay campaign and hopefully if enough people join in this protest it would put pressure on both the government and the energy suppliers to lower charges to that of our european counterparts.

  9. Susan

    Presumably the MP meant you should wait until March. What about the winter?

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