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!

Should We Be More Like China?

All is not what it seems.  Copyright Philippa Roberts 2012

David Cameron in his speech to Conservative Party Conference today talked about China.  I got the impression that he was asking whether the British economy should be more like China, which is
"creating a new economy the size of Greece every three months".

Now, putting that claim aside (at least until Tim Harford or FactCheck come back and tell us if it's true or not), is the Chinese economy one we should be aspiring to?

Last year, China's GDP was 9.3%.  This looks really impressive, especially when compared to our growth rate of 0.8% in 2011 (OBR figure in March 2012 forecast).

In fact, only in the last week the IMF has revised its growth figure for the UK downwards, from 0.2% to -0.4%.  It was only three months ago that it was saying 0.2% growth was possible this year - now it's saying the economy will continue to shrink.  The 0.2% growth prediction was clearly more realistic than the Office for Budget Responsibility, which predicted 0.8% for 2012 in November 2011, and stuck by its guns in March this year, also saying that:

"We still expect the economy to avoid a technical recession with positive growth in the first quarter of 2012."

Obviously now, after three consecutive quarters of the economy shrinking, that doesn't look like a good call, but as JK Galbraith famously said:

"The only function of economic forecasting is to make astrology look respectable."

That's a slight distraction.  As I was saying, copying China looks like a good idea, if you just take a snapshot of growth figures.  However, as I've mentioned before China is slowing.  Growth this year is predicted to fall to 7.7% and it looks like the July to September quarter will be the 7th in a row when growth has slowed.  Some commentators have been writing about the property boom in China, including this in the FT.  This property boom has come on the back of cheap credit and the now-expected property bubble sounds remarkably like the model that has just got us into our current mess.

The UK has a mature economy.  We industrialised over 200 years ago.  Many would argue that our economy was declining from the turn of the last century, but that this was disguised by two world wars.  Our average growth rates will never now be the same as those currently seen by China.  To make comparisons between growth in countries in Europe and China is to ignore the different economic histories, and makes no sense.

So I don't think we should aspire to grow like China.  We could aspire to green our economy at the rate China is greening theirs, invest in renewables with the same seriousness, but their model is not one which will fit us.  I'm still waiting for the vision of what our economy, a sustainable economy, will look like.