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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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