Labour’s energy price-freeze proposal harks back to the worst days of Labour’s wage-and-price controls, and before that to the disastrous efforts of the Soviet Union. Government interference in markets always does more harm than good. Imposing arbitrary price caps removes the incentive for suppliers to supply, and for investors to invest. The empty shelves of the Gum Department Store in Moscow were legendary.
Already Labour’s off-the-cuff proposal has been widely condemned by the industry and business groups. Centrica has reportedly said that it would consider leaving the UK if threatened with a price cap. It would certainly not invest in the UK.
And how would energy companies react? If faced with a likely Labour victory, they would simply raise prices ahead of time to cope with any rises foreseen for the 20-month period. The measure could well make prices even higher than they otherwise would have been.
Arguably most of the problems we face in the UK energy market today are the result of government meddling. If Labour’s plan looks like an off-the-cuff knee-jerk proposal that hasn’t been thought through, so did George Osborne’s Carbon Price Floor, a reaction to the failure of the EU’s ETS trading scheme to deliver higher prices and to incentivise low-carbon investment. Osborne never thought to consider that EU industry was disadvantaged already through Brussels’ energy policies, so he decided to disadvantage British industry even further. Not a smart move.
Meantime the industry has to cope with a whole series of measures – renewable obligation certificates, the ETS itself, the Carbon Reduction Commitment, Feed-in Tariffs, Capacity Payments. The list goes on. Potential investors look at Germany and see that Angela Merkel, in a panic response to the Fukushima incident, decides to close down the whole of Germany’s nuclear fleet.
But nuclear energy is a 60-year investment. Who is going to invest ten billion pounds in a project that can be closed down at the stroke of a pen?
The same principle applies in the renewables sector. Personally, I am delighted that investment in renewables is under threat. But it’s the same problem. The government’s mixed signals on wind and solar (blowing hot and cold, if I can put it like that) make investment exceedingly difficult. OfGem has warned of potential blackouts, and called for more investment in generating capacity. Regulatory meddling makes that hugely difficult. Labour’s thoughtless new policy proposal tips a new load of ordure into already muddy waters.