Freezing Energy Prices

The price of energy is a problem, partly because people in the United Kingdom are not used to paying high energy prices and partly because the price increases have continued while household incomes in real terms are falling.

Rising energy prices is something we have to get used to and change our behaviour to be able to afford the energy we consume. Insulation will prevent you from wasting energy. Solar water heating is the only renewable source where bit is economic to store the energy you create from the sun. Other renewables will eventually provide more energy to the nation as a whole but an array of PV on your roof will not keep your lights on in the dark and a wind farm nearby will not be designed to prioritise the provision of energy to the homes near to it.

When I first studied energy, twelve or thirteen years ago, I was astonished at how insipid, lacking in direction and foolish the energy policy of these islands was. Each successive energy policy became increasingly more foolish. There is a lack of quality and a lack of intellectual capability in the people who dream up energy policy.  The result is that we have a broken policy when it comes to energy which permits the energy companies to grow their profits, but does not guarantee our energy future.

In the United Kingdom energy prices for households have risen by 40% in the past ten years. I predicated a slightly lower rise ten years ago. The price rise is inevitable for tow reasons. First, the energy sources are becoming rarer, more in demand as the world’s population grows, and therefore more expensive. I expect that energy prices will continue to rise.

The second reason for the price rise is that in the United Kingdom there are six energy companies which supply 98% of the energy that households use. These six companies do not have to operate as a cartel. They do not have to secretly gather in motorway service stations and quietly agree to jack up prices in unison. They do not need to meet or even speak with each other. They simply have to read the newspapers and play follow my leader (at discreet distances) when it comes to pricing. They all sell the same product – the gas or electricity is supplied at exactly the same quality, no matter who your supplier may be. It has transmission and carriage costs but these are, the way the industry is organised, the same for every energy supplier.

The Labour opposition has suggested that will freeze energy prices for 20 months if they are elected into power. It is not a practical proposition. The energy companies will seize on the price freeze to cut investment in infrastructure. That investment is needed. They will maintain their profits by cutting their investment even though their margins will fall. They may well increase prices just before an election if they feel that labour is likely to be elected, and at the expiry of the 20 months price freeze will increase prices in a way which will make energy unaffordable.

Fracking is not an answer; there is no evidence that natural gas obtained by fracking will be less expensive than natural gas obtained from the North Sea or from the Middle East. The safety regimes that will have to be implemented in order to frack for gas will be costly, and if they are not costly they will not be effective.

I doubt if it is possible to successfully renationalise the energy companies. That would be complicated and expensive, and there is no guarantee that the nationalised industries, under political pressure, would behave any differently than the private industries, when it comes to squeezing the consumer.

It might be possible to increase competition in the energy market, but it is hard to see which investors would want to take on the mega-giants in price competition. Even then, the switching of energy suppliers is still not an easy or quick business, and much depends on meter readings and guesswork, because you have no guarantee that the company to whom you switch, will not jack up prices after you has switched.

Freezing the energy price for a while will only bring some temporary relief. Temporary relief is not what is needed.

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