As the election is coming up I thought it would be interesting to look at each of the main parties’ proposals for regulating retail energy markets in the UK. I will focus particularly on markets for electricity, but many of the same issues will also apply to gas.
Conservatives & Liberal Democrats
Not surprisingly, given the two parties have been in coalition for five years and that the Lib Dems have had a major role in shaping energy policy, there is relatively little difference in their approaches to retail markets for electricity. Both are promoting switching for consumers by reducing switching times to one day and both are pledging to bring forward the roll-out of smart meters. The Lib Dems also include a proposal to allow people to form energy cooperatives so they can benefit from group discounts and cut their bills.
The Labour party is proposing to freeze energy bills up to January 2017. They say that it’s not good that energy companies are vertically integrated, but offer no solution to this. They will replace OFGEM with a new tougher regulator with the power to force energy companies to cut their prices when wholesale energy prices fall.
We will fix the broken energy market, increasing competition and transparency so that it works for consumers. This will include introducing a simple new tariff structure so that people can compare prices in place of the complex and confusing system that exists today.
The policies above don’t give much indication at all of what they would actually do to fix the energy market or increase competition. They suggest introducing a simple new tariff structure but give no indication of what that might be. There is also notably no mention of a roll out of smart meters, something that even the environmentally sceptic conservatives have included.
Analysis: market or price regulation
The two policy programs present contrasting views of the role that consumers and regulators should play in the energy market. The platform offered by the Conservatives and the Liberal Democrats is based on a basic belief in market forces, that by making it easier for consumers to swap suppliers they will be all forced to lower prices and offer better customer service. They propose a host of mechanisms to support this, all based around making switching easier for consumers. The evidence on switching rates in the UK broadly supports this stance, with increasing numbers of consumers switching to smaller suppliers who are offering lower prices than the big six. There are also a huge number of small suppliers who can offer far better customer service and innovative products to consumers. The emergence of price comparison websites as a way to encourage consumer switching has also been significant and will help to ensure that there is competition for the big six. The Labour party’s proposals are precisely the opposite of the market based approach. Where they do offer any detail on the policies they would implement, they rely on what is effectively price regulation. They also want a new regulator, which looks essentially the same as OFGEM only with a new website and name.
The Labour party’s proposals for the electricity market are a big bag of pain for consumers and the independent retailers who are driving down electricity prices at the moment. Just to get this off my chest as well, in their manifesto they include the line “businesses say energy is the biggest cost they face”. Clearly they must have only been talking to aluminium refineries as this really isn’t the case for the vast majority of businesses. The commitment to ‘simplify electricity tariffs’ is particularly worrying, given that suppliers are already limited to offering just four products. Any further reduction would only serve to reduce consumer choice. There can be no further simplification of the tariffs themselves without the removal of the standing charge, something that is likely to have significant opposition from energy companies and the regulator.
Why a price freeze isn’t the solution
Currently it is the responsibility of consumers to choose their own electricity supplier. If they think they are being ripped off by the big six, they are free to move towards a smaller supplier who can offer lower prices. The Labour Party’s price freeze shifts the responsibility away from consumers and towards politicians and the regulator. It sets a precedent that high energy prices are something that the government should ‘fix’, instead of something that consumers should react to by switching.
A price freeze would reduce incentives for consumers to switch energy providers and allow the big six energy suppliers to continue offering products that are bad for the environment and offer terrible customer service. When energy prices rise, so do the number of consumers switching. In Q4 of 2013, when there was a particularly cold winter and bills rose, the number of households switching their electricity supplier almost doubled (696,000 in Q3 to 1,304,000 in Q4, OFGEM transfer statistics). If prices were to be frozen the incentives for consumers to switch would be reduced and the monopoly of the big six would continue.
As consumers, we should be thinking more about our energy usage and the responsibility to look for the most suitable tariff should fall with ourselves. When consumers switch it is one of the rare opportunities they have to consider their energy usage, to look at alternatives and to take an interest in sustainability issues such as energy efficiency. A price freeze would take the responsibility out of the hands of individuals and people would continue to let their direct debit do the work. That would be bad for consumers and the environment in the long run.
The problems with the big six energy suppliers go beyond just the prices they charge. They routinely rank at the bottom of customer service polls and are almost universally beaten by smaller independent suppliers. They offer no green tariffs so consumers wouldn’t have the opportunity to support the environment through their electricity usage when they switch. Price regulation would do nothing to help these problems, and if anything would make them worse. There are innovative products such as the flow boiler that wouldn’t be possible if consumers stopped switching. The only way to remedy these issues would be to encourage people to switch away from the big six.
As energy consumers our best hope is that Ed Miliband is simply electioneering and just saying this to win over voters who like the sound of lower bills. Hopefully if he does get into number 10 then this policy will be a one off and would not harm the competitive retail electricity market in the UK too much.