Price cap for electricity in the UK?
By Alberto Mingardi
A paper by Rupert Darwall for British think tank Reform a few years ago boldly argued that “Energy policy represents the biggest expansion of state power since the nationalisations of the 1940s and 1950s and is on course to becoming the most costly domestic policy disaster in modern British history”. Most of us who do not follow energy policy particularly closely are perhaps missing the extent to which the United Kingdom risks going back to pre-Thatcher attempts to “manage” the economy.
This is all the more troublesome, because energy liberalisation was one of the great successes of the early 1990s. The process was not without problems (power generation was basically a duopoly in England at the time, and was privatised as such) but ultimately led to a sharp rationalisation, to growing investments and to greater competition among suppliers. As my colleague and friend Carlo Stagnaro remarks in a piece for BloombergView, “since deregulating the sector in the late 1990s, electricity and gas retail prices in the U.K. have fallen and the quality of the service has substantially improved”.
Now Mrs May announces she wants to cap electricity prices, to “protect” customers against variable tariffs.
Carlo points out that:
Price caps assume that the problem originates with energy suppliers; but that is a misnomer in the U.K. case. One crucial finding of the CMA inquiry is that many customers could save significantly on their energy bills, if only they were more active in exploring alternatives. If customers are truly disengaged, as the CMA argues, a policy that nudges them into more activism could makes sense. But some of them may not switch simply because they are happy with their supplier, and attach a significant value to a long-term relationship. Either way, potential shortcomings in retail competition come from the demand side, not the supply side; hence any proposed policy should make customers more active, not suppliers less profitable.
It follows that the question the UK prime minister should ask her experts is: Will a regulated price promote customer engagement? Acer — the agency that coordinates EU energy regulators — provides data on switching rates and potential savings for a sample of 23 EU member states. Of these, 13 had no price regulation, whereas 10 had either price regulation or some other form of price-setting intervention. In the electricity markets, the average switching rate in countries with no price regulation was 7.7 percent, vis-a-vis 5.9 percent in countries with price regulation. By the same token, the average (potential) saving was higher in countries with no regulation (113.5 euros per year) than in countries with regulated prices (85.3 euros per year). The UK stands well above the average, with a switching rate and a potential saving of, respectively, 12.2 percent and 206 euros per year.
But making consumers alert is hardly a task a government would be content with limiting itself to. Carlo’s point that a free market needs consumer engagement doesn’t seem to meet the appetite of the lawmaker, whereas the call for increasing regulation of electricity and gas prices in the UK has been going for quite a while.
Nigel Lawson, Mrs Thatcher’s great Chancellor of the Exchequer and, as a former journalist, a man of memorable words (“the government of business is not the business of government”), once pointed out that energy policy was “guessing the unguessable”. The fact that public policies, energy policy included, are limited in what they can achieve is never a point law-makers like to make, with the exception of the very few likes of Lord Lawson. This may contribute to explaining why price caps are coming back in the UK utility market, and a few others, too.