UK PM’s Faux Pas

David Cameron’s announcement, that utilities will be forced to charge the lowest rates, seems to fly in the face of market dynamics and market liberalization.
Published: Thu 25 Oct 2012

What happened?        

England’s Prime Minister announced that new laws would be introduced to force power companies to provide customers with the lowest tariffs. He explained that he intends to “…be on the side of hard-pressed, hard-working families who often struggle to pay energy bills.”

Many were taken off-guard by this announcement, including the Department of Energy and Climate Change. Even shadow energy secretary Caroline Flint accused the PM of creating a policy “on the hoof” and creating "chaos." Flint goes on to explain that perhaps the PM misspoke as he was under a lot of pressure and that he shouldn’t have spent the day “pretending to have a policy they have no intention of implementing…” USwitch, a price comparison provider, says the announcement must have been a “slip of the tongue.”

Although nothing seems to have been set in stone, Energy Minister John Hayes announced his support of the PM’s intention. Hayes vows that the Energy Bill would be a "landmark piece of legislation" which will deliver lower energy prices for both commercial and residential consumers. He does agree that the topic is of a “complicated” nature and that the industry, consumer groups and the regulator will be consulted and details will be worked through. He adds that he is "profoundly concerned and disappointed" by recent price hikes and that he will be discussing this with the companies "as a matter of urgency."

But could it work?

Robert Webb of the Energy Collective says the announcement does not make sense. He explains that if all consumers enjoyed the same cheap tariff, there would be no market. The tariff would become a “mediocre” tariff instead of the cheapest. Webb adds that the whole system may as well be nationalized so that politicians can do as they please. USwitch says it would be the “death of competition.”

Webb suggests that the only way to create policy consistency in the energy industry is to take it away from politicians. He likens the scenario to the Monetary Policy Committee of the Bank of England which was liberated to set interest rates. Webb also suggests a complete energy market reform first.

Robert Peston, business editor of BBC, asked the boss of one of the biggest energy companies for his opinion on the PM’s announcement. He responded by explaining that companies will be forced to increase their basic prices if they are unable to adjust customers’ tariffs.

However, Peston does believe that the PM has highlighted an important issue: Why do consumers pay such wildly different amounts for their power despite a competitive market? He points to three issues:

  • Customers do not understand complicated power bills
  • There is no standardized structure for a basic energy bill so price comparison between companies is tricky
  • Customers don’t switch for fear of billing errors and they don’t believe the rates will remain low so they stay with their current service provider.

USwitch reports that three quarters of customers are still on the most expensive tariff and consumer switching is at an “all-time low.”

The UK’s Big Six power companies also make it very difficult for new competitors to enter the marketplace as they offer new customers hard-to-beat rates. The companies do not pass the cheap deals on to existing customers as they know that they are not shopping around for better deals. Based on this, Peston writes that the government should rather force all power companies to offer a single basic, easy-to-understand and easy-to-compare tariff, enabling more consumers to change providers more easily.

Taking the politics out of energy…

The Energy Collective quotes DECC Secretary of State Ed Davey, who said in response to a question: “Believe me when I say that no one would be happier to see the politics taken out of energy policy. What could make life easier for the Energy and Climate Change Secretary than political consensus?”

Killing the competition…

USwitch quotes Ann Robinson, Director of Consumer Policy at USwitch: “This has to be a mistake – the unintended consequences would be to kill competition. Consumers will be left with Hobson’s choice – there will be no spur, no choice, no innovation and no reason for consumers to engage any more. The only glimmer of hope would be that smaller suppliers will be able to offer cheaper prices than the big six and therefore competition is able to continue in that arena.”

Sources                                                                                                                                                                                             

BBC News Business-Energy companies vs Cameron

Sky News-Cameron’s Energy Price Vow Attacked by Labour

The Energy Collective-UK Energy Shambles: We Need to Take the Politics out of Energy

The Telegraph-David Cameron’s low energy prices for all are bad for business

USwitch-David Cameron shock statement rocks energy markets