Friday, May 12, 2017

Theresa May Faces Backlash Over Energy Price Cap

Plan To Cap Energy Prices Smacks Of 1970s Madness

In this newsletter:

1) May Faces Backlash Over Energy Price Cap
The Times, 9 May 2017 
2) May Admits Energy Price Cap Is Not 'Conservative' But Voters Come Before Ideology
The Daily Telegraph, 10 May 2017
3) GWPF: Climate Policies, Electricity Prices And The Energy Price Cap
Global Warming Policy Forum, 10 May 2017 
4) Rupert Darwall: Why A Price Cap Won’t Fix The Energy Market
CapX, 10 May 2017
5) Iain Martin: Plan To Cap Energy Prices Smacks Of 1970s Madness
The Times, 10 May 2017 
6) Energy Price Cap Concerns
Letter to the Editor of the Times, 1 May 2017

Full details:

1) May Faces Backlash Over Energy Price Cap
The Times, 9 May 2017 

Theresa May will press ahead with a promise to cap energy prices for 17 million households despite warnings that the move could force up bills for other customers.

The Conservative general election manifesto will include a pledge to regulate the maximum costs of standard variable tariffs, the default deals for the two thirds of customers who have not sought cheaper alternatives. The prime minister said that she expected the price cap to save families on poor-value tariffs as much as £100 a year.

Introducing a cash limit is the most radical of options that had been under consideration by the government. It is arguably the most significant intervention in the market since privatisation.

Energy companies, which are lobbying against a cap, have claimed that the move would kill competition, deter investment and endanger jobs. They are expected to try to protect their profits by scrapping cut-price deals, which can be hundreds of pounds a year cheaper, so forcing up bills for savvy customers.

Senior Conservatives, including Lord Lawson of Blaby, the former chancellor, have voiced their opposition, with some in government privately pressing for watered-down reforms.

City analysts say that a price cap could cut hundreds of millions of pounds a year from the profits of Centrica and SSE, Britain’s two biggest energy companies, jeopardising their dividend payments to pension funds and individual shareholders.

The prime minister committed herself to “capping energy prices to support working families” on a campaign visit in London yesterday, saying it was in the national interest.

Details of the pledge will be announced today by Greg Clark, the business secretary, who will make it clear that the prime minister is determined to pursue the more aggressively interventionist stance outlined in her speech to the Tory party conference. “It’s just not right that two thirds of energy customers are stuck on the most expensive tariffs,” she said then, as she promised to tackle “dysfunctional” markets.

Last night Tory campaign sources were braced for claims that Mrs May’s policy is all but identical to an energy price freeze proposed by Ed Miliband, then the Labour leader, in 2013. One said: “This will promote competition but prevent exploitation. Ed Miliband’s proposal would have wiped out all competition overnight.” At the time Mr Miliband’s proposal was strongly criticised by senior Tories.

Full story

2) Theresa May Admits Energy Price Cap Is Not 'Conservative' But Voters Come Before Ideology
The Daily Telegraph, 10 May 2017

Theresa May has admitted her policy of capping energy prices may not be “Conservative” but said supporting working people was more important than “ideology”.

The Prime Minister has faced criticism from the country’s biggest energy firms - as well as some within her own party - for pledging to bring in a policy that goes against traditional Tory free market values.

But Mrs May made it clear that she will not be bound by sacred cows when she decides on policy, saying “what matters is doing what you believe to be right”.

It came as it emerged that Mrs May only introduced the price cap policy after energy firms failed to heed her warning last year that she would take action if they did not curb price rises.

Instead of keeping prices in check, five of the so-called “Big Six” energy firms have hiked their prices by up to 37 per cent since then, forcing Mrs May to act.

The boss of Centrica, which owns British Gas, has warned that capping prices is anti-competitive and could “damage” consumers by encouraging firms to put up their prices to the capped rate, resulting in higher average prices across the board.

Lord Lawson, the former Conservative chancellor, is among those who oppose the idea of a price cap, describing the policy as “crazy”.

In a question and answer session with factory workers in Leeds, an unapologetic Mrs May was asked about the policy and said: “I believe that we should be doing something to curb rip off energy bills and I suspect there are many people here who get fed up with the way that energy prices keep on rising and yet the energy companies seem to make more and more profits.”

Lord Lawson has described the policy as "crazy" CREDIT: BLOOMBERG

She said of the price cap: “Sometimes people say to me that doing something like that doesn’t sound very Conservative. My response to that is when it comes to looking at supporting working people what matters is not an ideology, what matters is doing what you believe to be right and I think something like that could make a real difference to people and a real difference to people’s lives.”

She said she still believed in free markets and competition, but “if we see that a market this is supposed to be competitive is not truly competitive, then I think it's right that we support working families by doing something about that”.

Full story

3) GWPF: Climate Policies, Electricity Prices And The Energy Price Cap
Global Warming Policy Forum, 10 May 2017 

In the run-up to the general election on 8 June, the GWPF is calling on all parties to adopt policies that prevent further economic harm to the UK economy and halt the rising policy costs to energy bills for households.

Theresa May is proposing a cap on increases to energy prices charged on the Standard Variable Tariff, which covers about three quarters of the United Kingdom’s 26 million households. It is essential to grasp that she is proposing a cap on the prices for gas and electricity charged under some domestic energy tariffs. It is not a cap on bills and it does not affect all tariffs.

The Prime Minister has suggested that this controversial move is the result of some deep-seated injustice in the energy markets. She says that “if you want fairer energy prices vote for me”. The implicit target here are the energy retailers, a safe target since no one trusts them.

In response, energy companies claim that renewable energy subsidies and other policy-driven costs are the main cause of recent price rises.

The last set of data published by the Government in 2014 shows how policies have been driving up prices to domestic consumers, and how they threaten even greater price impacts in the future.

The cost of government policy on electricity prices in 2014 was estimated have increased prices by 17%, some £24/MWh. These figures were essentially confirmed by the Committee on Climate Change’s more recent study of Energy Prices and Bills which estimates that in 2016 climate policies were still responsible for about 17% of the total electricity price to household consumers.

Median electricity consumption of electricity in the UK is approximately 3.5 MWhs, so this amounted to about £91 per household per year, or roughly £2.4 billion a year, assuming 26 million households.

The Prime Minister says that she is “fed up with rip-off energy prices”, and claims that consumers pay £1.4bn a year more on Standard Variable Tariffs than they need to. Yet the government’s very own climate policies are responsible for a much bigger rip-off, more than £2bn a year in fact, just on domestic electricity bills.

Furthermore, UK climate policies add another £4bn to the bills of industrial and commercial consumers, a cost that they pass on to households in higher prices of goods and services. If a supermarket has to pay more for electricity to run its refrigerators it must recover this cost in the price of fish fingers and milk and the checkout.

Energy and climate policies have a negative effect on the general cost of living that is both much larger and much broader than any defects in the Standard Variable Tariff. According to the government’s own estimates this problem is set to grow dramatically. In 2020 the price impact will have more than doubled, to £52/MWh, or about £180 a year on the electricity bill, a nationwide cost of about £5 billion per year.

Moreover, according to official figures, the Climate Change Act will cost the UK economy over £300 billion by 2030, costing each household £875 per annum.

The Prime Minister is clearly right to be concerned about the cost of energy to households, but in seeking to put price caps on energy suppliers she has chosen the wrong target, energy retailers, and the wrong instrument, price caps. Her own government policies are much more of a problem, and much more readily addressed.

Price caps will almost certainly prove to be counterproductive, causing higher prices later in the cycle as the result of damage to investment signals. It would be both simpler and more effective, and much more beneficial to consumers, to abandon all extravagant and ineffective subsidy spending on renewable energy that is driving prices up for years to come.

See also GWPF Energy Manifesto 2017


4) Rupert Darwall: Why A Price Cap Won’t Fix The Energy Market
CapX, 10 May 2017

Proposals to impose price caps on energy bills highlight the mess Britain’s energy policy has got into. For some time, politicians of all parties have been imposing policies that force up energy costs. Now they want to cut the energy bills that have been driven higher by their own policies.

The only good argument for price caps is the Leninist principle of “the worse, the better,” as the move brings forward the day when the entire policy collapses.

In its June 2016 energy market investigation, the Competition and Markets Authority noted the role of decarbonisation policies in pushing up costs. “Pressure on prices is likely to grow in the future, due in part to the increasing costs imposed by climate and energy policies,” the CMA stated.

The CMA was being polite. Thanks to fracking, there is a worldwide glut of hydrocarbons which should have seen electricity prices in Britain fall.

In the mythology being spun by BEIS ministers, the Big Six energy suppliers act like privileged insiders, extracting rents from customers. This will come as news to three of the Big Six (Centrica, EDF and RWE) who between them lost £132m on their domestic electricity supply business in 2015.

Rather than excessive profits, the CMA’s analysis pointed to a “material degree of inefficiency” in current prices. This is one reason why the CMA came out against imposing a price cap for all standard variable tariff customers, warning that price caps ran the risk of undermining the competitive process, “likely resulting in worse outcomes for customers in the long run.”

In its report, the CMA complained about lack of “customer engagement”. That is to say, the reluctance or inability of customers to shop around for better deals. This was especially true among the elderly, those living in social or rented housing and those who have relatively low levels of income or education.

In most markets, it can be rational to let others incur search costs as competitive dynamics deliver better prices for everyone else. The important issue, ducked by the CMA, is why this isn’t happening in the electricity supply market as it would then raise the fundamental question of the economic value of having retail competition in the first place.

Taking domestic electricity, in 2015 the aggregate costs of the Big Six supply activities (including their profit margin) was £2,902m compared to total revenue of £27,311m. That is to say, only 10.7 per cent of the electricity value chain is actually within the direct control of electricity suppliers. The remaining £24,409m, equivalent to 89.3 per cent of the total bill, represents fuel costs, transmission and distribution costs and government levies. In other words, supplying electricity is essentially a pass-through business.

In properly functioning markets, shifts in demand between downstream retailers drive upstream changes in wholesale markets. The problem in electricity is that they don’t. As I wrote for Capx when energy bills were a hot topic before the last election, Britain’s energy market is back under state control. The failure of the retail market for electricity is overwhelmingly caused by the failure of the wholesale electricity market which is a direct result of government policies mandating the generating mix and pricing off coal, the cheapest energy source.

These interventions have created a class of privileged insiders who have done very well out of government energy policies. Looking at the Big Six generating profits by generating type reveals who they are. In 2015, nuclear power generated earnings before interest and tax (Ebit) of £13.77 per MWh, thanks in part to Britain’s unilateral £18 per tonne carbon price floor. Renewables generated £51.64 of Ebit per MWh, in 2015 obtaining an average price 78 per cent higher than electricity from gas and coal-fired power stations to give investors a whopping 46.4 per cent profit margin.

Capping retail prices does nothing to curb this egregious rent-seeking. By contrast, in 2015 the Big Six’s gas and coal-fired power stations lost £3.70 per MWh at the Ebit level. The huge profit margin for renewables results in over-investment in unreliable and high-cost wind and solar capacity and virtually no investment in the new low-cost thermal capacity needed to keep the lights on.

BEIS ministers have convinced themselves that there is widespread popular support for the aggressive decarbonisation policies that are making energy more expensive. They should have the courage of their convictions and acknowledge that high and rising energy bills are a consequence of the decarbonisation policies they claim are so popular. Once they’ve done that, we can have an honest debate about how best to fund decarbonisation.

Centrica’s boss Ian Conn argues that green levies and other policy costs should be funded from general taxation. That would be a lot fairer than loading the costs on to energy bills and letting the poorest in society pick up the tab.

5) Iain Martin: Plan To Cap Energy Prices Smacks Of 1970s Madness
The Times, 10 May 2017

Some time in the late 1970s, the press spokesman to the then minister of consumer protection, Roy Hattersley, made a series of phone calls to members of the press. One of those on the receiving end recalls to this day the excitement. I have good news for your readers, he was told: Roy has managed to hold down the prices of shirts and underwear.

This was Britain before the dawn of Margaret Thatcher, when governments attempted to run a protectionist policy controlling prices and incomes, and ministers sat in judgment on the minutiae. A daft economic experiment distorted incentives and gummed up the workings of the UK economy to a calamitous extent.

It would be a stretch to say that the plans unveiled this week by the Conservatives to cap household energy prices instantly transport the UK back four decades. The proposed limit on the standard tariff is, for now, a modest affair. But in accepting the principle, mid-election, that governments should set prices, even in one area, the Conservatives have crossed too far into deeply dangerous territory.

Difficult and painful work was undertaken in the 1980s to wean the British off the notion that the government should control the economy. It took a long time for the adjustment to the market to be accepted. Now, the message goes out from the Conservatives that nanny-state government should step in if a price is perceived to be too high and there are sufficiently loud complaints. Those who do take the trouble to pay attention and switch energy provider will find price rises piled on them, rather than on the feckless who cannot be bothered to check and have their prices capped.

Why stop with energy bills? Why not have the government cap mortgage repayments when a fixed rate runs out? Why not cap the price of beer? I foolishly paid £5 for a pint in central London the other day. Can I have a public inquiry?

The reason the Tories have made this move now is obvious. An energy prize freeze unveiled by Labour in 2015 was popular. The Tories are pushing to convert voters deep in Labour territory, and this is designed to appeal on the basis that it sounds like sticking up for consumers.

This is economic illiteracy and a bad basis on which to make policy, because voters told by a prime minister that one set of prices can be capped may ask: why not more? Look where that got the country in the 1970s.

6) Energy Price Cap Concerns
Letter to the Editor of the Times, 1 May 2017

Sir, The government reportedly intends to impose a price control that would cut £100 off the energy bills of 17 million customers (News, Apr 25). This is despite the Competition and Market Authority’s recent investigation which concluded that such a price control, even if temporary, “would run excessive risks of undermining the competitive process” and was likely to result in “worse outcomes for customers in the long run”.

As part of its investigation the authority calculated, in an unconventional way, that customers were paying more than necessary: it explained that high prices were likely to be “due to inefficiency rather than excess profits” and that a price cap “would create substantial losses for the sector as a whole”.

Surely it is not UK policy to impose measures that would hold prices below cost and inflict substantial losses on companies? A few failed economies have resorted to this. But such measures do not characterise successful market economies nor do they reflect well on UK regulation and competition policy. 
  • Lord Lawson of Blaby, former secretary of state for energy
  • Stephen Littlechild, emeritus professor, University of Birmingham, and former director general of electricity supply
  • Sir Callum McCarthy, former chairman Ofgem
  • David Parker, emeritus professor of privatisation and regulation, Cranfield School of Management
  • Willy Rickett, former director general (energy), Department of Energy and Climate Change
  • Clare Spottiswoode former director general of gas supply
  • Peter Bucks, former non-executive director at Ofwat and senior financial adviser, Ofgem
  • Xeni Dassiou, reader in economics, City, University of London
  • Monica Giulietti, professor of microeconomics, Loughborough University
  • David Henderson, former head of economics & statistics dept, OECD
  • Tooraj Jamasb, Professor of Energy Economics, Durham University
  • Eileen Marshall, former managing director, Ofgem
  • Martin Ricketts, professor of economic organisation, University of Buckingham
  • Colin Robinson, emeritus professor of economics, University of Surrey
The London-based Global Warming Policy Forum is a world leading think tank on global warming policy issues. The GWPF newsletter is prepared by Director Dr Benny Peiser - for more information, please visit the website at

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