by Nick Butler

Ed Miliband’s comments on energy in his Labour party conference speech on Tuesday have profound implications for policy. The immediate focus will be on the suggestion of a price freeze lasting until 2017. The industry will no doubt focus on the implications of cutting profits and the question of what happens if world prices rise. Some might also suggest that a hard freeze will not only deter new investment, but also lead to some companies exiting the business with the net effect of reducing competition. Mr Miliband clearly believes there is profiteering but he has not published the evidence. The Labour leader should and there needs to be a full competition inquiry. It may well be that if there is profiteering a price freeze is not the only nor the best solution.

All that matters to suppliers and consumers, but I think there is a bigger issue. Prices are now clearly front and centre in the energy debate. That has seemed inevitable for some time – now it is in the open. It is hard to imagine that the government (or at least the Conservatives) will not accept the challenge and turn their own focus to costs.

Why then have energy prices been rising? There are three possible explanations. The first is that the industry has fixed the market and is milking the consumer. The second is that world market prices have risen and that the UK customer is now paying the price. The third is that structural changes in the market driven by policy are forcing prices up.

I am sceptical of the first explanation but would like to see the evidence. The second is clearly untrue. World oil, coal and gas prices have all fallen over the past 18 months. Oil has fallen by more than $15 a barrel. Coal is lower because of increased US exports. Gas is down because of low European demand among other factors.

The real reason behind price increases is the enforced shift of the energy mix in favour of expensive renewables. Every electricity bill indicates the extra charge. The policy was begun under the previous Labour government and has been accelerated since 2010 in order to meet targets for emissions reduction. The policy is hardly a secret and was supported by all parties at the last general election.

The focus on prices challenges this policy priority. Big decisions are coming up particularly on wind and nuclear power that would lock the UK consumer into expensive energy supplies for decades to come. If the priority is to reduce emissions that is essential and unavoidable – even with a good dose of efficiency gains there is no way of cutting emissions without shifting the energy mix away from coal and gas. The process has started but has a long way to go. Energy bills will keep rising.

But if the priority is costs then climate policy will have to be reconsidered and the planned emissions reductions delayed. The cheapest fuel sources for large-scale power generation now and for the foreseeable future are coal and natural gas. Shale gas – if and when it is developed – could reinforce the point but that is for the future.

It may well be possible to squeeze down the profits of the power generators and the utilities but the amount that can be squeezed is finite. The real question is what happens after such a squeeze. Having made energy costs the priority politicians will have to face up to the fundamental trade off with plans for emissions reductions. You can have low emissions or low prices. You cannot have both unless wind or nuclear prices can be forced down which looks impossible. The challenge is not limited to the UK. In Germany and other parts of Europe policy-driven increases in energy costs are imposing burdens on consumers and damaging the competitiveness of energy-intensive businesses.

Mr Miliband has opened the door to the real energy policy debate which is long overdue.


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