Freezing energy prices risks harming supply
26 September 2013
Associate Professor of Global Energy Monica Giulietti says Ed Miliband’s plan to cap energy prices for 20 months is likely to “challenge the energy companies’ ability to supply”.
The Labour leader announced at his party’s annual conference that he would freeze gas and electricity bills for 20 months if he wins the 2015 election.
Dr Giulietti has been studying UK energy prices for 20 years and believes such a plan raises concerns about future investment in the sector and might even push prices up before the freeze is set.
A better way of improving competition in the energy industry in the UK, Dr Giulietti argues, is to tackle the opaque nature of the wholesale market.
“A policy focusing primarily on price freezes is not likely to address the root cause of the lack of competitiveness in the energy market and it could actually create more incentives for suppliers to collude on prices while waiting for the price freeze, therefore achieving the opposite outcome to the intended solution,” said Dr Giulietti, who is part of Warwick Business School’s Global Energy Group. (Watch the video below on the Warwick Global Energy MBA that Dr Giulietti teaches on).
“The choice of a price freeze for a period of nearly two years would amount to an extreme case of regulatory intervention.
“It is important to keep in mind that any form of economically efficient regulatory intervention in a liberalised market requires a careful balance between price fairness for consumers and commercial viability for suppliers. It must therefore derive from an informed process which takes into account the main drivers of suppliers’ costs as well as consumers’ needs.
“In the last 10 years the main cost drivers in the energy markets have been mainly international factors such as the relative scarcity of alternative fuels in different geographical areas and international agreements on greenhouse gas emissions controls. To put a cap on prices without consideration for these external pressures is likely to challenge the energy companies’ ability to supply.”
In their paper ‘Price transmission in the UK electricity market: was NETA beneficial?' published in Energy Economics, Dr Giulietti, Professor Michael Waterson, of the University of Warwick’s economics department, and Luigi Grossi, of the University of Verona, found that the system set up by the last Labour Government to give consumers more choice and competitive prices has not been successful.
“One of the main reasons for the ‘market failure’ in the UK energy market, which Mr Miliband refers to, was probably the expectation that competition could be brought about by consumers actively looking for the most attractive deals and making informed choices about the cheapest deals available,” said Dr Giulietti.
“Several investigations into the market, such as Ofgem’s energy supply market probe, have shown that this has not happened to a sufficient level to promote active competition in the market.
“However, research undertaken at Warwick Business School shows that the key to a fairer deal for energy consumers lies instead in a more transparent and well-functioning wholesale market.”
Dr Monica Giulietti teaches Business, Policy & Regulation in the GEI and Economics of the Business Environment on the Warwick Global Energy MBA.