Ed Miliband‘s big announcement on energy prices caught everyone on the hop today.
The Labour leader told party conference delegates that gas and electricity prices will be frozen between May 2015 and January 2017, saving a typical household £120 and a business £1,800.
Shadow energy and climate change secretary Caroline Flint announced a fundamental shake-up of the energy market, promising to “break up the Big Six” energy companies.
The energy industry wasn’t expecting this and we can only imagine jaws dropping in boardrooms around the world (four of the Big Six are foreign-owned).
What exactly is Labour proposing and will it work?
To say that it would be unusual for a government to step in and fix the price of a commodity like this is an understatement.
Labour’s announcement was greeted with varying shades of bafflement and disbelief by all the energy industry insiders we spoke to today.
The first question is how the party actually plans to make good on this promise if elected.
At the moment, industry sources agree, there is simply no legal power available to a new Labour government to set prices like this.
Labour told us that the plan is to introduce new legislation to make it illegal for the companies to charge more than a certain price, irrespective of how much their costs change.
That would put the industry in a precarious position, as much of the cost of supplying gas and electricity – perhaps 50 per cent – is dictated by the wholesale price of fuel.
Professor Steve Thomas from Greenwich University told us: “There are elements of cost that are out of the control of the companies. If the price of gas doubles, what are they going to do?”
Presumably Labour thinks that given the profits the energy companies have posted in recent years, they ought to be able to take the hit.
But given the volatility of wholesale prices, the clear danger is that the business becames so precarious or simply unprofitable that the companies either can’t continue trading or can’t make the investment in infrastructure we need.
Analysts have also told us they doubt any legislation would be ready in time for the proposed start date for the price freeze – May 2015.
That timescale would give a new Labour government only a year to draft a complex new law that may well be subject to legal challenge by the industry under domestic and EU competition law.
The case for change
Ms Flint says she wants more transparency in the energy market. We’ve FactChecked this in the past and have some sympathy. At the moment, the Big Six don’t tell anyone what wholesale prices they are paying.
That makes it very difficult to tell whether rises in consumer bills are justified by rises in the prices the companies are paying.
The situation is complicated by the fact that most of the companies are both producers of gas and electricity (they own the power stations) and suppliers (they sell energy to you and me) at the same time.
They sell to themselves and each other at prices that are almost never made public, even to the regulator.
Ms Flint wants to change that, saying: “The energy companies will be forced to open their books. And do all their electricity trading on the open market, in a pool.
“A single place, in public, for everyone who wants to buy or sell power. No more secret price setting. No more back room deals.”
Labour also wants to stop the companies acting as producers and suppliers at the same time.
“Just as the banks will have to separate their investment and trading arms from the high street branches, so we will make the energy companies separate their production from the companies that supply your home,” Ms Flint told party delegates.
The suspicion among customers is that the companies exploit the secrecy by passing on wholesale prices rises to the consumer quickly and being slow to bring down bills when prices fall.
Ofgem says it has found some evidence of this, but many doubt whether the regulator has the teeth to stop it.
The case against
According to Prof Thomas, among others, separating producers and suppliers could have the unintended consequence of creating the kind of market that led to the California energy crisis of the early 2000s, when parts of the state were hit by rolling blackouts.
If producers are only concerned about their profits and don’t have to answer to customers, there is no incentive to protect the security of energy supply.
In fact, quite the opposite, according to Prof Thomas: “You make money out of a shortage because a shortage pushes the price up. There is an incentive not to invest in infrastructure.”
And investment in infrastructure is precisely what Britain needs at the moment to reduce hydrocarbon imports and safeguard energy security- £200bn of it, according to Ofgem.
Consumer Futures, often an outspoken critic of the energy companies, gave a distinctly lukewarm reaction to the Miliband announcement today when they warned that “the prospect of a price freeze may ramp up prices in the short term and dismantling the structure of the market may put off decisions by energy companies or others to invest in new, cleaner generation capacity.”
It’s fair to say that there’s a considerable amount of scepticism about this policy from people on all sides of the debate.
Experts have told us they doubt whether the law can be changed in time to make this plan work, the law would probably be subject to lengthy legal challenge, and it may well have unintended negative consequences.
On the other hand, we have FactChecked the energy companies in the past and found them wanting, which begs the question of whether the Big Six have brought this kind of threat on themselves by failing to put their own house in order.
By Patrick Worrall