Freezing energy prices: The facts

Politics is not won and lost in PMQs performances. Politics is something that happens in the homes and workplaces of people across the country. And right now it’s at the kitchen table where many families are making the choice between heating and eating – a topic that, to the shame of our country, will become more common in our national conversation this winter.

Perhaps it’s for this reason that the most common question to the Labour activist at the moment is ‘can Labour actually bring prices down?’  I’ve had my friends and family ask this in recent weeks when previously they’d just politely ask me to talk about something other than politics.

On the face of it the price freeze is basically a way to take money away from the big six energy companies and give some back to the consumers. John Major recently intervened into the political debate and suggested this be done via a windfall tax. Arguably Ed Miliband’s suggestion would be more of an economic stimulus effect because instead of going to the Treasury, people would actually see the effect on their bills and their household budgets. This may be the reason a price freeze is more popular with voters than a windfall tax.

Fairer wholesale prices

But why take money away from the energy companies at all? Aren’t they providing an essential service? Well yes – in one sense – but a big source of anger for consumers is what happens when wholesale prices fall and rise.

Energy companies buy energy at wholesale prices to sell to us to heat our homes. When wholesale prices drop (as they did in 2009 by 45 per cent) our bills don’t see the full effects (bills only dropped 5 per cent in 2009). But when wholesale prices rise our bills go up at much faster rates – for example this year reports suggest wholesale prices rose by 1.7 per cent when we’ve seen recent price increases of around 10 per cent. That’s about £100 pounds on energy bills for an extra £10 on wholesale prices.

So we know that something has to be done about it, but that still leaves the question of will it work?

To answer this we need to look beyond the headlines of Labour’s price freeze announcement to the details of what else is being put forward, which will determine whether Labour can succeed.

A new regulator

One of the central arguments underpinning Labour’s policy is the creation of a new regulator that will ensure drops in wholesale prices get passed on to people on their energy bills. The price freeze is just an initial measure until this is established.

Another aspect of the Labour energy policy is separating energy suppliers from generators – some companies do both at the moment – and forcing generators to sell energy into a pool to be bought by the suppliers. This will stop big energy companies generating energy themselves for much less than they sell it to us for but it will also bring more transparency to a confusing and secretive process. Labour recognises that more transparency will always aid the consumer.

If Labour is saying that the energy market is rigged (as Caroline Flint has argued for a while now) then this implies that we need new players. The party must now explain how smaller suppliers will be able to cope with the price freeze and still take on the big six energy companies.

The low carbon transition

Critics of Ed Miliband say that energy wholesale prices are very dependent on international conditions (e.g. the price of gas which is connected to geopolitical factors like who Russia is or isn’t getting on with at the moment). This is half true – about 46 per cent of our bills are based on wholesale costs.

But this is quite a short term point. Policies like a decarbonisation target for our power sector are designed to put the UK on a path to less dependency on international markets. The more energy generated here by renewable sources, the less we need to worry about Russia. Green groups will probably be making the energy independence argument a bit more forcefully soon but what to do about shale gas introduces some problems there – it would help energy independence if done sensibly and not at the risk of our climate change targets.

There has been some confusion over the effect of the price freeze on the political uncertainty around our climate change policy which is driving up the costs of the low carbon transition. But as we’ve seen the commitment to the low carbon transition has to be one of Labour’s comebacks to those who say the price freeze won’t work.

Better energy efficiency

Energy efficiency is another route to bringing energy bills down in the shorter term. David Cameron was wrong to say people should put on a jumper to save on their bills, but the UK has some of the worst housing stock in Europe for energy efficiency. The national scandal is not only that some people can’t afford to heat their homes it’s also that we’re paying energy companies so much to heat inefficient homes.

A massive street-by-street energy efficiency scheme backed by government could bring bills down as well as carbon emissions. And then there is the massive multiplier effect that would boost the economy from all the new jobs and trade in insulation and related services. The Energy Bill Revolution campaign lays out these arguments very well indeed.

But instead of a great energy efficiency scheme in the UK we have the Green Deal. It’s early days, but the first word that comes to mind is ‘shambles’. When initial results showed that take up was only four households the coalition knew something was up. That’s why we’ve heard so little about it during the national debate about energy prices. Labour’s big opportunity to bring bills down is to back up its market reforms with real action on energy efficiency.

So the answer to the voters’ question about whether Ed Miliband’s energy promise will work is broadly: yes, but it’s going to be hard, it will take time and it will require shared sacrifice. Labour has to do this with voters, not to them – that means getting support at the next election but also accepting renewable energy developments in local areas, a massive energy efficiency programme and also pledging to support the most vulnerable as we pay for the low carbon transition.

Re-framing the debate

The key thing you need to know about the energy prices debate is encapsulated in a point that was made very well recently by Andrew Pakes. Of all the responses to the price freeze announcement, none of them have tried to defend the way the market functions. What Ed Miliband has done is to open a discussion about the way the market works for ordinary people.

When millions can’t afford to adequately heat their homes this winter, politics has to do something about this. If politics can’t do anything about energy prices and the wider cost of living crisis then we may as well all line up behind Russell Brand. Now there’s a thought to really scare the Daily Mail.