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Labour’s plans for UK energy price controls could raise likelihood of blackouts

Author : Alan Franck, Editor, HazardEx

25 September 2013

The energy regulator Ofgem warned in late June that the risk of Britain suffering a major power blackout will rise significantly towards the middle of the decade as ageing generating plants are retired from service. The regulator said the margin of supply capacity over demand could narrow to between 2 and 5% by 2015 and 2016, warning that more investment in power generation is needed to protect consumers from the threat of blackouts.

Labour leader Ed Miliband
Labour leader Ed Miliband

Ofgem has been expessing concern on this since 2009, when it first identified the issue of tightening capacity margins in the face of tough environmental targets, increasing gas import dependency and the closure of power stations.

Against this background, Labour party leader Ed Miliband pledged at the Labour Party Conference on September 24 to freeze energy bills for 20 months if he becomes prime minister, to scrap Ofgem and to smash the dominance of the Big Six energy firms. He also said his party would create a million green jobs through decarbonising the UK's power sector by 2030.

Labour believes a price freeze could save families around £120 a year and cost energy firms around £4.5 billion in lost revenue. City observers say total losses could be at least twice that figure.

Labour’s accusations of profiteering are strenuously denied by the utilities. According to British Gas, for example, on the average £1,188 gas and electricity bill, £1,035 goes on external costs not controlled by the energy company. It says that on the average bill, £568 goes towards wholesale energy costs, £283 goes towards delivery, £112 covers environmental and social policies and £72 goes on taxes. Its own costs, it says, are £104 and its average profits £49.

The difficulty is that the country needs to invest £110bn over the next 10 years to renew the country’s power stations and energy infrastructure to keep the lights on, and given the state of government finances, most of this will have to come from the energy companies. Paying for an enormous increase in investment requires higher profits, and paying for those profits requires higher prices.

Angela Knight, chief executive of energy trade association Energy UK, pointed out the main problem: "Freezing the bill, may be superficially attractive, but it will also freeze the money to build and renew power stations, freeze the jobs and livelihoods of the 600,000 plus people dependent on the energy industry and make the prospect of energy shortages a reality, pushing up prices for everyone." 

Another aspect is that an important element in energy price increases has been the large rise in green taxes and subsidies for renewables introduced by governments in recent years.

Ed Miliband was one of the people who imposed those high costs on consumers as the Secretary of State for Energy and Climate Change in the last government. Thirteen days after his appointment to this role in October 2008 he announced that the British government would legislate to oblige itself to cut greenhouse emissions by 80% by 2050, rather than the 60% target previously announced.

He followed this up in April 2009 by introducing a change to the government's policy on coal-fired power stations, introducing rules on carbon capture so stringent that two European companies that had been planning to build clean coal plants pulled out, with the loss of significant potential generating capacity.

The likely effect of Miliband’s proposals are very serious indeed, according to prominent City fund manager Neil Woodford.

“This policy is economic vandalism at a time when this country needs all the help it can get,” he said, according to the Daily Telegraph. “It is insane, not least it is also fundamentally dishonest to suggest to the electorate that electricity and gas prices are where they are because of profiteering by the companies.”

“The margins have stayed the same, the return on capital has stayed the same. There have been umpteen investigations into the retail energy market by Ofgem over the last 10 years. But at no stage did any investigation highlight cartel activity or price fixing activity. There is no evidence of profiteering.”

“What we have had in the last 10 years – not least when Ed Miliband was energy secretary – is any number of policies that have been specifically designed to raise prices such as the carbon price floor or massive renewable policies.”.

Woodford says the UK energy sector is crying out for investment to maintain supply, but the stated policy of the Labour Party, leading national polls around 18 months away from the next general election, will increase uncertainty.

“Here we have a serious politician, standing up and saying what he said which I think at a stroke torpedoed any chance that any of that investment will happen between now and the next election,” Mr Woodford said.

“If Centrica and SSE cannot make any money supplying electricity to the retail market then they won’t supply it. The lights will go off, the economy will shut down.”

Woodford is head of equities at Invesco Perpetual, which has stakes in both Centrica and SSE. Almost £2 billion was wiped off the share prices of the two London-quoted energy groups after Miliband's announcement.

Centrica said a price freeze would render the industry non viable. “If prices were to be controlled against a background of rising costs it would not be economically viable for Centrica or any other energy supplier to continue to operate, far less meet the investment challenge that the industry is facing. The impact of such a policy would be damaging for long-term prosperity.”

SSE warned that the freeze would put its energy supply companies out of business.

Woodford said: “It is so damaging for an industry where we have the potential to attract inward investment from sovereign wealth, from China, from Russia and from France.”

“We will now encourage them when thinking about investment to significantly downgrade the attractiveness of the UK and significantly upgrade the attractiveness of investing elsewhere or returning cash to shareholders.”

Even leading figures in the green sector questioned the move. According to BusinessGreen, Dr Nina Skorupska, chief executive of the Renewable Energy Association, queried how the energy sector could be decarbonised if bills were frozen.

"Investment is already on hold as Government works through the details of Electricity Market Reform, so a freeze on bills must not be allowed to lead to another freeze in renewables investment," she said.

"If we are to keep the lights on, boost our domestic energy supply, mitigate the risks of dangerous climate change, create green jobs in new industries and meet binding renewable energy targets, then we need to be accelerating the rate of growth in renewable energy and we cannot afford another investment hiatus."

Miliband's proposals may well strike a chord with an electorate squeezed by remorselessly rising bills, but he now needs to explain how vital investment in the country’s energy infrastructure can be guaranteed despite his price controls. Otherwise, the effects on the UK economy are likely to be very serious indeed.

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