Wednesday, 10 May 2017

How to Deliver Competitive Energy Markets.

Like most proper Conservatives, I find myself extremely uncomfortable with the notion of a price cap on our energy market and said so when Labour offered their idiotic price freeze at the last election. This is not because we don't wholeheartedly accept that the market is currently malfunctioning. It is. But the answer is not to interfere with the market. It is to make the market work. 
For this some government action is required. But that is not the same as saying that government action is required to cap prices. For a market to work consumers need information. At present this is what is lacking. 

Take the market for petrol and diesel. Since the supermarkets started selling fuel 30 or more years ago the market has been transformed. Few would now argue that there is not real competition. Most drivers will know when the price goes up and down by even as little as a penny. Why? Because the price is prominently displayed on forecourts and in a way that is easy to understand. There is some government regulation involved since they are all obliged to see their product by the litre. And that is all that is required. The market does the rest. 

This is what is wrong with the market for gas and electricity. There is is such an array of differing tariffs and special offers that consumers are confused. It is impossible for anyone who does not have a degree in statistics and a information technology to understand and compare. This is a deliberate tactic. It is this that needs to be addressed. 

All that the government needs to do is outlaw the current range of confusing tariffs. There should be standard tariffs that all suppliers need to offer with simple and easy to understand prices per unit. Furthermore suppliers would not be allowed to enforce contracts for long periods meaning that suppliers would not be able to entice new customers with good opening offers only to raise prices once customers were tied in. 

This rather than the blunt instrument of a price cap is what is needed. It would have the added advantage of being entirely consistent with Conservative philosophy. No Conservative argues that markets exist without the need for regulation. We do argue that regulation should be kept to a minimum and should not regulate for regulations sake. A price cap may be smart politics but it is lousy economics. Suppliers forced to compete on price will want to set a price that delivers a decent return on investment allied to the ability to keep investing while attracting an optimum number of customers. That is how markets should operate. Price caps will not deliver. 

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