BLOG: Would Ed's price freeze really put the lights out?

Power-hungry Ed Miliband has really put the cat among the pigeons with his promise to freeze energy prices, says MT deputy editor Andrew Saunders.

by Andrew Saunders
Last Updated: 04 Nov 2013
Whatever you make of his leadership potential, Ed Miliband’s promise to cap energy prices for 20 months to ‘reset the market’ should he win the next general election is looking like the smartest political move the Labour leader has made to date.

The tumult of reaction this morning proves it - he’s getting the kind of column inches that every opposition leader dreams of, even if much of it is written in acid by outraged utilities company execs.

Centrica chairman Roger Carr was quick off the mark, saying such a move could spell ‘economic ruin’ for the firm and that it could increase the risk of major systemic power shortages in the near future.

The industry has also wheeled out its official spokesperson in the shape of Angela Knight, head of trade body Energy UK, to bemoan the suggestion. As the former head of the British Bankers Association, she knows a fair bit about public denial of private excess, if it comes to that.

They should both be careful - there is likely to be a good deal of public support for the suggestion, and it will be very easy for the utility firms to fan those flames rather than damp them down by knee-jerk and over-stated defences of the status quo.

In terms of profitability, utilities do indeed ‘only’ make margins comparable to those of the large supermarkets - in the 4%-5% bracket, as has been pointed out by some observers today. But the comparison is not a very good one - the competitive threats to a supermarket’s forward revenue stream are many, varied and volatile in comparison to those faced by a large energy utility.

Utilities are such prized investment assets, precisely because their revenues are so stable even in time of recession. But their managers and shareholders should not make the mistake of thinking they are in a high-margin, high-risk business. A 20 month price cap would not do Centrica’s profitability any good of course, but would it really bring a firm with annual revenues of almost £24bn to the brink of ‘economic ruin’?

Besides - profits, while headline grabbing, are not the issue. The first major flaw in Ed’s wheeze is that the real problem facing the energy industry is one of investment. If there is a risk that lights will go out, it predates this proposal by decades and is a result of that familiar British disease, chronic under-investment in infrastructure. (The second being that the now-almost-exclusively foreign owners of our utilities might simply take their money elsewhere, of course. But that’s another story).

So rather than all this public argy-bargy, what’s needed is a framework for channelling more investment by the utilities into a properly planned energy infrastructure renewal programme. Sadly there seems little chance of common sense prevailing on this any time soon - only a couple of days ago Centrica was forced to scrap plans for two £1.5bn gas storage facilities, which would have reduced gas price volatility, due to a last-minute change of mind over subsidies by the Government.

Perhaps the best way to view the furore so far is less as an argument about economics, and more as the opening salvoes in a debate about the balance of power between energy utilities and their customers.

Here at MT we’re settling down to enjoy the ride, while laying in a few candles just in case.

Meanwhile, we hope Ed Miliband is up to date with his electricity bills - the last thing he needs after getting off to such a big start is a Justin Welby-style volte face because he’s forgotten to charge up number 10’s smart meter, and the revenue protection squad is on its way round…

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