Labour’s Big Gamble


September 27, 2013

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In a nondescript North London suburb, late on Tuesday night, there was a power-cut.

In a curious quirk of fate it was the very same suburb that Ed Miliband, leader of the UK Labour Party currently resides.

Earlier that day, he’d been addressing his annual party conference in Brighton, where he unveiled his key – and controversial – energy policy to cap UK bills.

For those who may have missed the commentary and speculation as to what the Labour leader’s plans would mean for UK energy if he were elected, here’s a quick recap.

Essentially, if Labour returned to office in 2015, aspirational Ed would force the energy companies to freeze consumer energy bills for two years.

In the following days chaos ensued.

Labour colleagues jumped to his side, congratulating him on what was described as a brave and fair policy that would support hard hit consumers.

While the Conservative and Liberal Democrat Coalition Government were spitting feathers over a policy that would strangle energy investment in future projects; with two of the major utilities operating in the UK (Centrica and SSE) collectively seeing £1billion wiped off their combined market value overnight.

Evidently then, the market has already provided it’s knee jerk reaction.

However, in the cold light of day, what would the policy mean for UK consumers, businesses, renewables and wider energy investment?

In the first instance, and since the privatisation of the UK energy utilities market in the late 1980s and early 1990s it’s worth remembering a not insignificant market regulator, known as Ofgem. Ofgem, as older readers may recall, was quickly handed the power to regulate the energy markets and ensure UK consumers paid a fair price.

How effective this body has been in the preceding years is of course open to debate. And historically the UK energy market has been characterised by chronic under investment and uncertainty. Two facts that have led many to the conclusion that either the energy firms have been putting profit before investment (still good news for the pension funds), or that consumer prices remain too low to provide adequate future investment.

For wind energy, a sector that requires commitment and backing from the utilities, the concern is that reduced incomes will see a slow down in the pace of development.

That’s a situation that forces the government to go cap in hand to overseas sovereign wealth funds. For many, that is an uneasy thought. And it’s not an easy route to follow either – check out the UK nuclear industry for more details.

Now, unpicking Ed’s policy in this column isn’t possible. However, what is evident is that with the markets already fair from stable, suddenly it injects a whole host of fresh industry unknowns.

Will the utilities ramp up prices in the short term, in a bid to fix the rate high and compensate for any potential shortfall and loss?

Is this perceived artificial price fixing something that’s even legal under current EU directives and international law?

And with the prices fixed for 24 months, and with the market faced with a potential investment hiatus, how does this benefit the UK consumer – and protect him against real rate rises – in the future?

Because let’s be clear; given the escalating cost associated with importing and extracting oil and gas, those bills are only ever going to rise.

Ed may be looking to save the UK tax payer £120, for two consecutive years but if that’s the true value placed on the UK energy market, then it’s no wonder that many within the market have been speculating that it’s not just the inhabitants of a north London suburb that’ll be left in the dark.

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