Sunday, 18 January 2015

Energy Prices and why Miliband "Price freeze" would have been a disaster - and is still affecting our bills

This blog matters because Ed Miliband and Ed Balls want to run our country. Labours policy of an energy price freeze for 18 months shows how little they understand about economics and basic budgeting: I will set out below the consequences of his energy policy on Northumberland consumers here and now, but first the Room 101 basic economics lesson:

- If you require by law a company to "freeze" its prices for 18 months then it has buy at least18 months of stock up front - whether this is gas, oil, timber whatever.
- if the price of gas oil etc goes up then this may be a good thing as you have frozen your price. [NB you can do this with all the companies anyway]
- however, if the price of gas, oil etc goes down then both the original supplier company AND you the consumer / purchaser are stuck with an 18 month fixed price - even though the core product of oil and gas has gone down in price.

This is happening right now: oil and gas have dropped dramatically in price - and if you had taken the Miliband price freeze you would be stuck with a higher price.

Yet it is even worse: because there is a risk that Labour could win the election, and bring in this mad plan, it is still affecting present energy prices: dont take my word for it - look at the prices, and industry commentators set out below....

Thus, Ed Miliband’s ill-conceived price freeze is one of the main reasons for companies’ failure to pass on reductions, because if prices rose after the start of a price freeze suppliers would make losses.
Counter intuitively, the proposed freeze has therefore caused consumer energy prices to be higher than they could otherwise have been at this time.

Just one major company, E.On, has so far cut its prices, announcing a gas price cut of 3.5 per cent of £24 a year – which it said was “a risk” due to the price freeze.
Another major company, npower, suggested last summer it would be cutting prices but for Labour’s freeze.
"The political and media pressures at the moment make it more difficult to reduce prices and then increase them again next spring,” Paul Massara, its chief executive, said. “We are acutely aware that if the Labour party were to implement their proposed price freeze, we will be living with the consequences of our standard rate tariff price for a very long time and beyond the level of risk that we could manage in the wholesale market."

While some suppliers are thought to be holding back cutting prices in order to avoid risk, others have already bought so much energy further in advance than normal, in order to ensure they can afford to freeze prices, that they are now unable to benefit from the lower wholesale costs.

One of the Big Six suppliers, SSE, responded to Labour’s freeze by announcing last March it would freeze its own prices until 2016. It admitted at the time that it was buying its energy much further in advance than usual and might therefore be unable to pass on the benefits if prices fall.
At the time SSE's freeze was seen as a coup for Labour as it was thought unlikely that prices would fall, but mild weather has seen persistently low gas prices since last summer.

If a company had bought 85 per cent of its gas for this summer back last April, leaving only 15 per cent to buy now short-term markets, it would have spent about 8 per cent more on the gas than if it had left 50 per cent to buy at today’s lower prices.
Peter Atherton, the independent utilities analyst, said: “The election is undoubtedly a real risk; given Labour's price freeze idea it is a significant barrier to lowering prices.
“I think it’s leading to materially higher prices for consumers.”

Sam Laidlaw, the recently-departed chief executive of British Gas owner Centrica, told the Telegraph last month that Labour’s freeze would have “unintended consequences”.
“I think the clear concern is that people will have bought some of their energy further forwards than they otherwise would have done, in order to mitigate the effects of the price freeze. And that means that retailers’ ability to take advantage of a softer price are limited,” he said.

If you want real help on energy bills I suggst you have a look at my local booklet with local suppliers and details on everything from switching to biomass and oil buying clubs. See here:
It is entirely your choice to vote Labour at the next election. But your energy bills will go up for sure. The evidence is here right now.