Why The Energy Price Cap Doesn't Go Far Enough

British Gas has raised electricity prices by 12.5% and its rivals are likely to follow suit. Another round of inflation-busting increases has put calls for an energy price cap back on the agenda.

When then Labour leader Ed Miliband first proposed a cap in 2013 it was dismissed by the Tories as coming from a “Marxist universe”. Four years later, Theresa May flirted with the idea ahead of the 2017 election, while Labour included the policy in its manifesto. But whatever it is, it’s not a Marxist idea.

For a start, the price cap won’t work because the market is not only broken, it never worked in the first place. Incredibly high start-up costs mean energy is a natural monopoly, in which a small number of companies have been protecting significant investments in fossil fuels and nuclear power since the sector was first privatized.

Yes, you can regulate markets, but that requires a regulator with both sufficient teeth and the nerve to use them, and one which does not believe that switching suppliers is the answer to all its problems.

British Gas’s move will add £76 to an average family’s bills each year. In theory, people could simply choose a different supplier, most likely from another of the “Big Six” energy firms who dominate the UK market. But there are lots of reasons why people won’t switch.

First of all, humans are generally poor at envisioning their future circumstances. Offer someone an amount of money in six months’ time, and then see how quickly they’ll take a fraction of that now instead.

Second, energy supply is something householders fundamentally rely on, and the difference between one supplier and another really isn’t that much extra if you’re happy with the service you have. So for those who can afford it, paying less than a tenner extra a month to avoid the hassle and for a bit of reassurance they won’t be left hanging in the case of a power cut is going to be worth it. And there are many more reasons people won’t switch, simply because humans are highly complex and rarely completely rational creatures.

The belief behind the cap is that up to 10m “disengaged” Big Six customers could’ve been protected from price hikes if they’d switched.

This may be true, especially in the short term or if they’d switched away from the Big Six, but it conveniently ignores the fact that a common cause of price hikes is governments signalling their intent to intervene in the market. And unlike governments, energy suppliers think in decades, so any threat of a cap will merely be seen as a signal to drive up prices while they can, and then start lobbying like hell to get the cap raised by justifying the need for more of their costs to be passed to the consumer. An effective regulator might withstand this onslaught, but if we had an effective regulator there wouldn’t be a need for the cap in the first place.

Price collusion can’t be avoided

The problem with competition in the energy market is it encourages the sort of collusion and price fixing that even classical liberal economist Adam Smith warned about centuries ago. You can’t completely design out the potential for collusion because suppliers and network operators have to work together, otherwise the lights go off. And those who control the greatest assets in the market will exert the greatest influence on it – it doesn’t have to be active collusion, it’s a natural feature of imperfect markets.

Competition also means companies waste vast amounts of money paying staff to develop competing applications for different locations and technologies, when what is really required is a national strategy that sets out what is needed, and where, over the sorts of multi-decade periods energy suppliers need to justify investment. And then why bother wasting money putting those contracts out to tender? It clearly hasn’t worked for the railways.

Eco-socialism

A price cap is hardly a “Marxist” solution to all this. A traditional Marxist energy policy would of course start with renationalizing the industry, as energy supply is an issue that requires strategic planning at a national level. A Marxist solution would also push highly-skilled workers towards the socially-productive renewables sector, which even government estimates say could support more than 35,000 jobs across the UK.

Where eco-socialists, including myself, sometimes differ from traditional Marxism is on quite how much state ownership we see is necessary. I see a lot of value in community ownership because it doesn’t just help solve the energy problem, it also helps make people and communities more resilient. Towns and villages can’t become energy cooperatives overnight, however. They need investment, technical expertise, and an awful lot of support to get up and running. Does that sound Marxist? We already do it with private companies.

The Labour manifesto included support for a publicly owned energy company in each region, and the SNP has proposed something similar. It’s not a complete solution, but it’s a big step in the right direction. Maybe it’s another idea Theresa May could consider borrowing?

Keith Baker, Research Associate in Sustainable Urban Environments, Glasgow Caledonian University

This article was originally published on The Conversation. Read the original article.