This blog was first published in the Manchester Evening News on 29 October 2013.
Ronald Wilson Reagan, 40th president of the United States from 1981 to 1989, addressing the White House Conference on Small Business in 1986, said: “Government’s view of the economy could be summed up in a few short phrases: if it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.”
Policy in itself is easy enough to define (the Oxford English Dictionary describes it as “a course or principle of action adopted or proposed by an organisation or individual”), but good policy is rather harder to pin down and, even it were easily described, sadly politics all too often gets in the way.
Since the Labour Party conference and Ed Miliband’s announcement of a price freeze on energy bills for 20 months should his party form the next government in 2015, the topic of energy prices has been intensively commented upon.
The past two weeks have seen two of the “big six” energy companies announce rises in their average prices and it is almost certain that the other four will follow suit over the coming few weeks.
The public’s frustration at rising energy prices at a time of low wage inflation is understandable and, whilst the policy message is understandably popular, it is confused at best and dangerous at worst.
Contrary to popular belief, energy prices did not rise after privatisation (see chart above); electricity prices stayed broadly flat for three years before falling steadily for the 10 years to 2004 by 27 per cent. Gas prices fell by 30 per cent from privatisation to their low point in late 2000.
Since then, the picture has been very different: gas prices are now double what they were in 2005, and electricity prices are 55 per cent higher over the same time.
Wholesale prices driven by concerns over supply and the rapidly increasing global demand are part of this but government policy has played a significant part.
Levies on the cost of energy to pay for the carbon emitted, to subsidise green energy supply and to subsidise energy-efficient retrofitting are all included in your bill, though not itemised, so you don’t see them.
Add into this the levies on the companies to pay for the upgrading of the infrastructure and it mounts up.
Ofgem estimates 6 per cent of gas and 11 per cent of electricity bills are government green policy driven. Another 5 per cent is VAT.
Average profits from the big six energy companies last year were around 5 per cent and it’s hard to argue that is excessive, particularly with the scale of investment required over the coming decade to keep the lights on, and that will come from the profits of the energy companies, profits which will be eroded by freezing the consumer price.
Government policy is directly increasing the cost of energy, whether through taxes or levies or by having not invested in infrastructure so as supply certainty weakens, wholesale prices are driven higher.
It may be that it’s worth the extra charges for the longer term investment – you can make your own mind up about that – but what is confused is government deliberately raising the costs of energy delivery and then complaining about it.
They tax it, regulate it, levy additional charges on it, and then seek to subsidise it. That is madness.