Commercial awareness: think like a professional about... energy price freeze

Our banker, lawyer, accountant and consultant take a look at Labour's surprise new policy

Labour leader Ed Miliband made an unexpected announcement at his party's conference last month. If they win the general election scheduled for May 2015, Labour will freeze consumer and business energy prices for 20 months.

The policy is a response to rapidly increasing energy prices in the UK caused, Labour claims, by the power a small number of companies have in the market.

The UK's energy landscape is dominated by the "Big Six" companies. Over 99 per cent of energy powering UK households is supplied by one of Centrica (owner of British Gas), EDF (owned by the French government), E.ON, RWE Npower, Scottish Power and SSE (formerly Scottish and Southern Energy).

"[The Big Six] have been overcharging people for too long because of a market that doesn't work. It's time to reset the market," said Miliband in his speech.

However, the energy companies claim that price increases are inevitable due to global supply issues beyond their control. They argue that a price freeze will force them to cut investment in the UK's power infrastructure and could lead to job losses in the UK's energy industry.

In reaction to Miliband's speech, Angela Knight, chief executive of industry group Energy UK, said: "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 the prices for everyone."

Prime minister David Cameron has called the proposed price freeze a "gimmick" and has accused Labour of wanting a "Marxist universe" with strong governmental control over business. It has, however, been popular with the general population - apparently 58 per cent of voters would like to see the policy brought in now (YouGov).


Lofty purposes

Power companies buy the gas they need on the wholesale markets, and they may well use banks' gas traders to do so. They claim they've had to keep increasing their charges because of rising global gas prices, and these have certainly been spiralling upwards over the past couple of years. But it's not just the markets and the bankers that are to blame on this one: the costs of government environmental schemes such as carbon levies and free loft insulation programmes are also partly behind our higher bills.


Getting competitive

It's been reported that Labour has a number of other methods in mind to combat what it sees as the anti-competitive practices of the "Big Six" alongside the price freeze. These include making it easier for consumers to change energy company, introducing an electricity trading "pool" to facilitate more transparent trading, and separating the Big Six's generation and supply of energy branches into separate businesses. If implemented, the Big Six may challenge these measures in court, but note that many other EU countries have energy price-control mechanisms in place.


Adding it up

Researchers at the House of Commons have calculated that savings made by UK businesses as a result of the proposed price freeze could amount to as much as £1.5 billion. The size of this figure certainly goes some way to counter accusations that Labour's move is anti-business. However, business and individuals alike are likely to suffer from a sensible accounting step the energy companies are likely to implement: inflating their bills immediately before the freeze to recoup the money to be lost in advance.


Good strategy

The controversial price freeze proposal has undoubtedly taken the party one step to the left of the UK's political centre ground, but the fact that the policy has been popular with voters across the political spectrum shows that in politics, as in many areas of business, taking a bold risk can pay off. How much of a risk was it, though? It's likely that many months of focus group research, probably run by consultants, took place before the policy was allowed to see the light of day.