Energy Market Chaos

Copyright Philippa Roberts 2012

There are so many things that were wrong with David Cameron's announcement yesterday during PMQs that all energy companies will be forced, through legislation, to put all consumers on the lowest tariff, that it is difficult to know where to start.  FT has a good article on it, but I think there are three key things that are wrong.

Firstly, is the fact that it seemed to take everyone by surprise, including the Energy Department.

Secondly, is the fact that this is so ill-thought out in terms of the impact on the lowest tariff, as I've blogged about before here.  In a market with a single product and legislation that means you have to offer everyone the lowest tariff, it is going to be hard to argue for more than one tariff.  Without further legislation to then cap this tariff, there is no logical reason why a profit-driven company wouldn't make sure that the new 'lowest' tariff is higher than the current lowest tariff.  The consumers lose.

But my third issue with the announcement is the fact that is seems to fly in the face of a belief in free markets and competition.  The central tenet of the competition argument is that consumer choice improves service levels and reduces cost as we all move providers based on rational decision-making and full information about what is available.  Exactly a year ago there was an Energy Summit at Number 10, when the main energy companies, the Big Six, where upbraided. A review of competition in the energy market has found many faults, including poor supplier behaviour.  Yet, according to Which? the average household is paying 13% more than a year ago for its energy bills.  There is plenty of evidence that the market isn't working well, and that Government action so far hasn't changed that.

However, the announcement yesterday flies in the face of everything one would expect from this Government, by essentially killing competition in the energy market.

The strange thing about this is not just how confusing it is from an ideological point of view, but also how confusing it is in practical terms.  Poor Ed Davey, the Energy Minister was making a speech yesterday where he said:

"The coalition is absolutely committed to getting these reforms right, through legislation and through the signals we send.  We have listened to investors and today have set out further measures to provide the certainty they need to make decisions.."

At a time when the economy could be growing, investor uncertainty comes from a Government that doesn't have  a coherent plan.  Legislating against competition when you say you believe in it, and are pushing it in other areas such as water, just doesn't make sense.  No wonder everyone is struggling to explain what it all means today.  Think it deserves the same picture as the last blog - dark clouds on the horizon!