Coffee House

Politicians shouldn’t meddle with energy prices

19 October 2012

3:05 PM

19 October 2012

3:05 PM

David Cameron’s announcement in the House of Commons on Wednesday – that he would force energy companies to give people the lowest tariff – caused a stir. The Downing Street comms machine has been trying to clarify the new policy ever since and we’re only just starting to see a clear idea taking shape.

So what are we to make of it? Well, there is almost no competition in the energy market. There are only six big companies, and those are regulated within an inch of their lives. So with no proper competition, you could make the case that government has a role to make sure that customers are properly informed about prices, so that they won’t be cheated. For example, if you buy your energy in advance and online, you could save around £200 off the average household bill of £1,300. But most households, when they sign up with an energy company, find themselves placed on a ‘standard’ tariff and remain unaware that there are cheaper ones.

Making sure that suppliers at least told them the options – and making sure that those options were clear, intelligible and understood – seems a good move in the direction of transparency. It might not be needed if we had proper competition, because eager firms would be delighted to undercut their rivals, but as long as we have such limited competition, this further intervention could be justified. Something like it happened with rail fares, where people were being quoted exorbitant prices. Now customers have to be told what the cheaper options are.


But it is no business of the government to dictate what suppliers should charge, or to make them ensure that their customers pay the minimum amount possible. In the first place, there are large numbers of choices. If you have gone shopping for a mobile phone or bought car insurance recently, you will know what I mean. People, and households, are different, and only they can decide what is the best option for themselves. An outside agency, be it the government or the suppliers, cannot do it for them. If the government dictates prices, it could indeed eliminate the last vestige of competition from the market.

And people have to look at these options for themselves. One of the big downsides of regulation is that it makes people feel safe and comfortable. They don’t imagine that they should be questioning the probity of their bank, or the prices charged by their energy suppliers, because they feel that the government’s regulators have already done that. But competition is a much better protector of the consumer than any number of regulators can be – as their failure to save us from a banking crisis highlightd so clearly.

To some extent, these problems will be solved by the introduction of smart meters, which will automatically move consumers onto the tariffs that are best for them. And that is not very far away. So it’s an interesting question why so much political energy and parliamentary time is being expended now. But the only lasting solution is more competition in the energy market. It was right to privatise the sector, and to privatise it in ways that were practicable. But now, as with the division of British Gas and the break-up of the monopolistic airports operator BAA, it is time to get new players into the business by opening up the possibilities of competition. And it is competition that will keep energy prices down, not politicians.

Eamonn Butler is Director of the Adam Smith Institute.

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Show comments
  • GLWbirkbeckFFC

    There are two main functions of a politician, to govern and represent the people they serve. Any politician or other misguided person who believes that it is not the role of our elected representatives to deal with the cost of supplying energy to our homes is greatly mistaken.

    The fact that David Cameron made the announcement to compel energy companies to offer their cheaper tariffs, is evidence enough that this issue is rising ( just like constituents fuel bills) up the public agenda. Some research shows that around a quarter of UK households now live in fuel poverty.

    A quarter of constituent homes classed as being in poverty is nothing short of a national disgrace. This can`t be ignored by politicians any longer, its simply too many potential votes to ignore.

    Increasing supplier competition is great, but so few people switch, let alone understand how to actually do it. OFGEM which is the regulator of the energy market is clearly failing to get a fair deal for the customer. If they wont do, the government must. We need action now.

  • martinlovetype

    the opposition get involved too: Old people are dying of cold, how are the big 6 left to get away with it? This is a question of fairness and if the gov step in a sort it then fine. Otherwise better regulation than ofgem is needed.

  • bluplanet

    I love the underlying assumption that competition is the only option. Why should it be? A privatised energy market clearly doesn’t work because it inevitably leads to LACK of competition as mergers and acquistions take place among the less competitive who don’t have the financial clout of the big players. A nationalised system would be a monopoloy but one controlled by the tax payer.
    Another facile comment: regulation didn’t prevent the banking crisis. So exactly what would have done then, in a capitalist de-regulated world? Stunned silence….

  • alastair harris

    but they don’t meddle with prices. Instead they meddle with the “taxes” – so transparent as to be rendered invisible. They meddle with regulation in the “market”. And they play “politics” with the suppliers. “Smart meters” – how on earth is that a solution to anything? You know something is wrong when it requires a degree and the patience of a saint to work out which tariff you should be on. Outsourcing that decision to a machine sounds like a disaster waiting to happen.

  • Daniel Maris

    We should be using QE to build a green energy infrastructure which will deliver low energy bills (the operational costs of green energy being very low).

    Delivering cheap energy and plentiful free water (as the Romans did let’s not forget, in the latter case) is I consider a basic function of good government.

    • TomTom

      QE funds the NHS each year – if you want to go thev full Zimbabwe Route look forward to 331 million percent inflation. There is NO gold backing QE and no idea how the Government thinkis it could ever unwind QE without causing a Depression far deeper than the one we have

  • 2trueblue

    Why not, they meddle in everything else?

  • David Trant

    Strange how energy prices are now soaring in a way they never did when we had a more sensible way of running our energy supplies, in the public sector.

    The more the looney Right call for more competition, it failed before, the more the public call for re-nationalisation: trust the people.

    • Ruby Duck

      There are genuine issues with the way ‘competition’ is structured, but you’ve got a few wires crossed if you think energy was cheap under the old regime.
      In the 60s you got one bath a week, bedrooms and bathrooms were unheated, there was a coal fire in living room and you caught hell for leaving doors open.

  • William Blakes Ghost

    Smart Meters? What is Butler smoking? They won’t address the problem because it will be the Energy Cartel that decides the tariff and as Butler himself pointed out there is precious little competition out there so how is a gimmick that just hands more control over to the Cartel going to improve things? And where is Butler going to magically create this competition he alludes to from? if he leaves all the control in the hands of the current Energy cartel they aren’t going to let in any other players. He’s just fantasising.Its like that cartoon that shows the project plan chart with the progress line on it that stops abruptly with someone having scribbled ‘and then the miracle happens’.

    Quite frankly this is the most ridiculous piece of vacuous garbage I have read in weeks but given it is from the Director of a “Think” [sic] tank I should not be surprised really.

    PS But competition is a much better protector of the consumer than any number of regulators can be

    Perhaps Mr Butler should look up ‘Giffen goods’. This really is the most absurd article I have read recently. It’s a joke.

  • alexsandr

    Every time they have a price rise then the government gets more in VAT. They should cut VAT on domestic fuel or exempt it altogether. it was introduced to depress demand. The price of energy does that so the VAT is not needed.

  • In2minds

    @fea9867767266ae12e833ea383e9713a:disqus – The salient points cannot be answered. The Danish island of Bornholm already has smart meters so the energy company and not the consumer controls the supply. Pretty loony if you ask me, but that’s what they have got.

  • ShaleGasExpert

    My proposal here shows they should meddle. Please don’t confuse the free-market with Centrica!

    It includes this that Adam Smith needs to remember:
    If Ben Franklin were alive today, he would update his famous maxim to say “There is nothing so sure as death, taxes and gas and electric bills.” First or second hand, we all pay for them, either as direct payments or through all we consume.
    A key point lost in the UK vision of a retail “energy market” is that utility bills are not optional. Just as US Supreme Court Justice Oliver Wendell Holmes said “Taxes are the price we pay for a civilized society”, utility bills are the price we pay for the basis of a modern life of heat and light. The alternative of not using electricity or gas is available to fringe moralist groups possessed of strong opinions and sturdier bank accounts, but the choice is neither realistic or attractive to most of us. We must not forget this key fact: use of gas and electricity serve a purpose analogous to further, and very regressive, taxation.[

  • Rhoda Klapp

    Smart meters? From the Adam Smith? Let me tell you that smart meters as envisaged by our masters are a way of switching off individual devices or the entire house supply when there is a shortfall in electricity. To have such a provision allows the supplier to chisel on his obligation to allow for peak loads at the expense of the customer. The government interferes in this market from top to bottom. The iniquitous carbon reduction subsides for renewables come out of our pockets, with no choice. There is no realistic plan to maintain levels of supply beyond the near future. This has all been known for several years, and we are expectedd to swallow this article as if it were authoritative.

    It’s at times like these that I want the Spectator to use its influence to put inadequate policy under the spotlight. That is does not is symptomatic of the general failure of all of our media to live up to its duty.

    • dalai guevara

      ‘The government interferes in the market from top to bottom’

      Yes, simply due to the fact that this is a classic ‘no competition’ industry. Either you introduce proper competition or…you nationalise it. Facilitating competition through reduction of options? Who are they kidding?

  • In2minds

    “Politicians shouldn’t meddle with energy prices” – but they do, it’s called the green agenda.

  • HooksLaw

    The government aren’t meddling with energy prices – they are saying that utility companies should offer the best deal for their customer and not hide it behind a load of confusing alternatives.

    Amazingly the Labour party seem upset by this.

  • TomTom

    Those who set up privatised utilities did so by skewing regulation in favour of utilities, and now British suppliers are owned by global oligopolists like E-On or EDF and British Gas that obfuscate their purchasing and transmission costs to create internal costs as disguised profit. They are not forced to be internally efficient but are rather like pet tigers kept mellow with red meat and they pursue a policy of building huge cashflows at the expense of consumer spending. They are in a conspiracy with the Government which has imposed green levies as stealth taxation rather as the Oil Companies know the Government complicity in petrol pricing.

    It is nothing to do with Competition. It is an administered market. Britain should not be dependent upon gas to generate electricity, it is a heating fuel source. It should encourage more use of coal to heat. It is frankly farcical that Utilities are Quasi-Banks with a more solid cashflow than banks themselves and yet Goldman Sachs just like Enron used to, is active in trying to impose a squeeze on contracts at key points for speculative gain.

    There is nothing Competitive in any Market today – it is simply the Oligopolistic Stage of Monopoly Capitalism Karl Marx forecast as its downfall

    • HooksLaw

      As soon as you read words like ‘they are in a conspiracy with the government’ – you know you are dealing with a loony tune.

      • Rhoda Klapp

        Funny how you fail to answer salient points but run immediately to name-calling. Prat.

      • TomTom

        Green Levies are a conspiracy between Untilities and the Government. So too is the need to keep Utilities highly profitable so Consumers can pay to build a) Windmills b) Nuclear Power Stations instead of Shareholders having to suffer dilution when Bonds are issued to cover Capital Costs. Utilities should be highly leveraged to pay for CapEx – they are Cashflow Safe – but in this country Consumers are fleeced to pay for CapEx so Shareholders suffer no reduction in Dividend Streams

  • LB

    Smart meters will only profit the people installing smart meters.

    Savings are less than the cost of installing by many times. It’s just another cronyism business trying to get the government to force people to buy from them.

  • John_Page

    When oligopolists compete in a commodity market, they obfuscate in the interests of their profits. “Competition” in this market among oligopolists will never produce transparency.

    Here’s the answer (not by me). Energy suppliers would have to offer consumers a transparent tariff in this shape (businesses can already get it).

    Benefits would be economic & political. Economic: more money in people’s pockets. Bills would rise and fall in line with the wholesale market.

    Political: clarity for consumers = more votes, demonstrate care for consumers in hard times, cut the Gordian knot of the DECC/DC conflict, and outflank Labour’s big idea of abolishing Ofgem (which might still be abolished or at least slimmed down).

    Oligopolistic competition over a basic commodity? Never trust it.