UK: Milliband's price freeze would cause market turmoil

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25 September 2013, Gas, Electricity

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However, his idea is flawed, and highlights a larger issue. Both current Prime Minister David Cameron and Milliband seem to struggle with energy policy. Milliband, as the former secretary of state for energy and climate change, has less of an excuse.

There are parallels between Milliband's speech and Cameron's almost off-the-cuff remark in October 2012 that he would force suppliers to put all consumers on their cheapest tariffs. Cameron's sentiment and intent was clear and noble enough, but any attempt to unpick what the statement meant in practice leads to more and more questions, and a suspicion that it hadn't been thought through at all. The obvious interpretation means that suppliers could only offer one tariff - their cheapest - and that the policy would have the undesirable outcome of making these "cheapest" tariffs in fact more expensive. Cameron's statement did lead to some direct changes to the market, and the reduction in the number of tariffs that can be offered by suppliers to four per meter type, down from hundreds of tariffs in some cases.

In the same way, while Milliband's promise is understandable in the context of voter angst over rising energy bills as well as the need to be seen to be standing up to "powerful interests" and providing a solution, the simplicity of a price freeze quickly unravels when the details of implementation are considered.

As energy companies face costs outside their control, a price freeze will leave them exposed to large potential losses. Centrica chief Sir Roger Carr called the plan "a recipe for economic ruin for a company."

The obvious strategy for suppliers continuing to supply customers under such a regime would be to dictate an extreme risk-averse hedging strategy, which would come at a premium that would be passed through to consumers before the price freeze takes effect, while also limiting the scope for price reductions if costs in fact decreased. In addition, the price freeze will put a chill on investments towards security and decarbonization and curtail the ability of new entrants to win new customers.

In a letter to suppliers Milliband highlighted that his policy is underscored by the need to "rebuild public trust in the energy market." It is clear he hasn't fully thought through how best to achieve this.

Source: MarketLine

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