The madness of Miliband’s energy price cap

Until Ed Miliband announced that the UK has such expensive energy that he must do something about it, I hadn’t actually noticed that we have some of the cheapest gas and electricity prices in Europe. But, as it turns out, we do.

According to the Times, the average bill in the UK is around €1,550. In France it is €2,500 and in Germany it is €3,200. Only in Finland do gas prices come in lower than in the UK, while we are the third cheapest country in Europe for gas and electricity combined.

I think this is rather amazing. Given the recent fall in the pound (something related to government policy, not to rapacious business behaviour) and the rise in green subsidies, I would have thought UK bills would be rather higher. Let’s not forget that energy bills rose 10% when Miliband was energy secretary (Oct 2008 to May 2010) and that at the time he was clear that “there is no low cost energy future.”

Indeed, as Chris Booker noted in the Sunday Telegraph, there is no one in the UK who has “done more to drive Britain’s energy bills through the roof than Mr Miliband, the man who passed the Climate Change Act, easily the most expensive law ever put through Parliament.”

The current government has kept going with this, and also set about making it rather worse by pushing up the carbon price floor (see Margareta Pagano on this here). We are, as SSE’s chief executive notes, “all paying for successive governments’ environmental and social policies through our bills.”

Capping prices that you pushed up with bad policy in the first place is third world politics, the kind of politics we had thought we were finished with after the 1970s. Then, both the Conservatives and Labour went mad for price controls, with the Tories, says John Littlewood in his book The Stock Market, apparently “intent on proving it could handle controls with more panache than Labour.” Much good that did any of them.

Mr Miliband’s freeze goes no further than the price controls of the 1970s to solving any of the problems the state has created. He says it is temporary – 20 months. But why only 20 months? And what then? Either the energy companies hike prices to protect their margins, or he puts on another freeze. It is hopeless as a price reducer.

But that’s not the worst of it. Even the discussion of a freeze has caused a raft of new problems. Capital investment in the UK is pitifully low already (largely thanks to the short-termism forced by pay incentives) and this isn’t going to do much to help that.

Only this morning we heard that the chief operating officer of Scottish Power has written to Ed Miliband to point out that “to the extent such a freeze would cause investors to doubt that they would receive an adequate return or to fear future similar interventions, those doubts and fears would be reflected in the appetite to invest.”

Price controls always cut supply – that’s just the way economies work. But as we are a bit short of energy infrastructure in the UK at the moment this isn’t really the kind of thing I like to hear even before Miliband gets anywhere near Number 10. If the energy companies can’t make money, or think they can’t make money, says Neil Woodfrod, “the lights will go off.”

The upshot is that this talk of price freezing is a stunt – and a pretty stupid one at that. A old policy – and one that has failed in the past (Matthew Parris is good on this) – dressed up as an attempt to deal with yet another problem of various governments’ own making.

As Tim Harford puts it in the FT, it is as though Miliband “looked enviously at chancellor George Osborne’s Help to Buy policy and wondered if he could possibly find something as crude, populist and ill advised.”

Maybe that it is exactly what happened. It is hard to think of any other explanation for the idiocy of the idea.