Britain’s energy crisis needs a long-term solution

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Since the Labour Party Conference in September, the issue of increasing energy prices has been the main subject of political debate. In his Conference Speech, Ed Miliband announced that a future Labour government would freeze energy prices for 20 months in an effort to restructure what he considers to be a broken competitive system. Even former Prime Minister John Major has called on the government to consider introducing a ‘windfall tax’, at a time when the Conservative Party is seeking to review the cost of green levies on consumer bills. So, are these price rises necessary, in order for energy companies to reinvest? Should the issue be tackled in this manner? Or is Ed Miliband’s freeze, as David Cameron described it, a ‘con’.

In the last few weeks, four out of the big six energy companies have announced rises in their electricity and gas bills. Recently British Gas has raised their prices by an average of 9.2%, SSE by 8.2% and npower announced an increase of 10.4%. These increases are at first glance astonishing, particularly at a time when some families are already struggling to pay their energy bills. Nevertheless, this hasn’t stopped these companies from justifying their actions as a consequence of rising wholesale prices, which makes up 46% of the consumer energy bill.

At a recent meeting with the Energy and Climate Change Committee, William Morris, the managing director of SSE, claimed that his company had seen a 4% increase in wholesale costs over the last year, and that the cost of transporting energy to homes had risen by 10%. These figures however were not recognised by the regulator ‘Ofgem’, who argued that the wholesale price of electricity and gas have on average only increased by 1.7%, which would add only £10 to the average £600 consumer bill. This apparent difference in figures is yet another setback for the big six.

Since Ed Miliband’s announcement the energy companies have continually attacked the proposal. Their main argument against any prize freeze stems from the fact that the market for energy is global, meaning that the government is unable to control certain costs, such as the cost of global supply and any foreign levies imposed on the energy companies. However, the recent price hikes are not linked to any rise in these costs, and as Ofgem has stated, wholesale prices have only slightly risen in the last year, whereas the profit margins made by the energy firms have doubled in the past year, from £45 to £95 per customer.

Ed Miliband’s proposal is therefore a very appealing concept to the ordinary voter, though it has sparked criticism from the coalition. David Cameron has therefore proposed that the government should review the green levies that make up only 9% (£112) of consumer energy bills. However, green levies are needed in order for there to be investment in new forms of energy for the future, thus creating thousands of new jobs in the renewable sector. Furthermore, these levies are used to provide deductions on bills for low income individuals and families, as well as free loft insulation, thus reducing the amount of energy households require. In short, neither proposal is sufficient enough in order to address the issues of rising energy prices and securing the UK’s energy future.

What is most definitely needed is a complete reform of the structure of the energy market. The problem at present is that the big six energy companies control the entire supply chain, from the generation, to the trading, and then finally the retail, creating a fully integrated system that is bad for competition. Labour’s idea of ring fencing the energy companies’ generators from their supply side is certainly more credible than their price freeze proposal. Furthermore, there is need for a tough new watchdog that has the power to penalise energy companies who raise their prices when there is a reduction in wholesale costs. It is possible that a mixed economy in the energy market will reproduce the much needed competition and transparency, but first our energy market needs restructuring before any huge policy shift can take place.

 

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