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Thursday, January 02, 2014

The price of energy

With Labour confirming what we have long-suspected, that the big six energy companies paid nearly £4bn above the average market rate for their electricity and charged customers about £150 extra over three years as a result, it is little wonder that the government remain under pressure to do something about this oligopoly.

To be fair some action has been taken, with Ofgem introducing more simplified tariffs and the UK Government has cut fuel bills by £50 and are putting pressure on companies to do more themselves. Anybody who thinks that Labour's price freeze is the answer though should think again, as Ed davey makes clear in this article.

He has dismissed Labour leader Ed Miliband’s suggestion that a two-year price freeze would solve the issue of soaring energy bills as “highly irresponsible” and a “con”:

In a forthright condemnation of the proposal, the Energy Secretary said the move is “highly irresponsible and fails to deliver what consumers want,” adding “we think it’s a con, because the energy companies will all shove up their prices before and certainly shove them up afterwards, so the consumer won’t get any benefit.”

Mr Davey said that the price freeze would hit the small, independent, gas and electricity companies much harder than the Big Six suppliers.

That was because a significant rise in the wholesale price of gas – the main determinant of household energy bills – could push the retailers’ into loss if they are not allowed to pass that increase on to their customers.

The greater financial strength of the Big Six would enable them to absorb retail losses for two years, while the smaller companies could potentially go out of business. “Labour is actually a friend of the Big Six,” he said.

Mr Davey also put himself on a collision course with the Prime Minister, the Chancellor, the Environment Secretary, Owen Paterson, and the Energy minister, Michael Fallon – all Tories who have said that a shale gas boom could bring energy prices down in the UK, as it has in the US.

It was by no means certain that there would be such a boom, said Mr Davey, and that, even if there was, this would not bring down prices. “I always focus on the evidence and analysis and the evidence and analysis suggests that, while shale gas may have many advantages, it is extremely unlikely that with the UK doing it alone there is going to be any price reduction as a result of shale gas.”

That was because the US has a largely isolated gas market, so that any surge in supply forces down prices. By contrast, the UK is connected to the international gas market through interconnectors, so any excess supply would be exported at current market prices and would have little or no impact on domestic prices.

I am particularly pleased at the scepticism shown about shale gas and also about the move towards creating a single European energy market which will improve competition and help to keep prices down.
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