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Freezing energy price promise is not the answer

Labour's promised energy price freeze won't address the real problems in the energy market, according to Dr Monica Giulietti from the Global Energy Group, Warwick Business School.

"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, as several observers have suggested, therefore achieving the opposite outcome to the intended solution.

The choice of a price freeze for a period of 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.

One of the main reasons for the ‘market failure’ in the UK energy market, which Ed Milliband 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. 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 (Giulietti, Grossi and Waterson, 2010*)."

* Giulietti, M., Grossi L. and M. Waterson (2010), ‘Price transmission in the UK electricity market: was NETA beneficial?’, Energy Economics, 32, 5, September, 1165-74.