Labour’s energy price freeze: hot air or good for business?

Posted: October 2, 2013 in Business energy, Energy market, Energy prices
Tags: , , , , ,

Ed Miliband’s announcement that Labour would freeze energy prices for 20 months if they win the 2015 election generated headlines, hot air and hysteria, while also putting the Conservatives on the back foot.

According to Labour the plan would save households £120 and businesses £1,800, and is required because the ‘big 6’ suppliers have repeatedly failed to pass on falls in the wholesale cost of energy. The response from Centrica (owner of British Gas), npower and others was predictable, with the companies maintaining that a price freeze would deter desperately needed investment in new generation capacity.

Energy price pressures

UK energy prices are determined by three primary factors:

  1. wholesale energy markets: affected by fluctuating demand/supply internationally, economic factors and unexpected incidents (eg the Japanese earthquake and nuclear disaster caused gas prices to spike)
  2. 3rd party, or non-commodity, charges: distribution and transmission costs are rising as investment in the UK’s energy infrastructure increases to link new renewable generation to the national grid
  3. government taxes: green taxes such as the Renewable Obligation and Feed-in-Tariff

In 2007 third-party charges and taxes accounted for around 25% of total electricity costs; that proportion is now nearer 40%, accounting for a significant proportion of prices increases over the last few years.

Questions for Labour

While the price freeze certainly sounds appealing for hard-pressed families and businesses, there remain numerous questions as to its feasibility

  • will the price freeze cover all elements of energy costs?
  • if so, does that means transmission and distribution infrastructure investment will be capped/reduced to prevent prices rises for 20 months?
  • what is to stop energy suppliers raising prices the month before the May 2015 election?
  • what is to stop energy suppliers hiking prices 21 months after Labour win the election?
  • if energy companies freeze investment in new generation capacity what are the implications for the UK’s ability to keep the lights on?

What to do…

If Labour win in 2015 and attempt to impose a price freeze it’s likely that there will be legal challenges from the big suppliers, so there’s no guarantee that the price freeze will actually happen.

In the meantime the best way for businesses to minimise future price rises is to monitor the energy markets to identify the best time to contract. Depending on your corporate requirements, the vast majority of businesses can fix prices for up to 3 years, which reduces the risk from price spikes as just effectively as Miliband’s plan.

The key thing is not just to wait until your annual renewal: your next energy contract can be agreed up to 3 years in advance so don’t wait until your renewal notice.

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  10. […] Miliband has pledged to impose a 20 month energy price freeze if he wins power next year, a proposal which sparked intense political and media interest when […]

  11. […] One election promise that the energy industry won’t be sorry to see the back of is Labour’s misguided (and rather pointless) pledge to fix energy prices. […]

  12. […] a few years and it was Ed Miliband promising that Labour would freeze energy prices for 20 months if they won the 2015 election, which generated headlines, hot air and hysteria, while also […]

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