Small Earthquake in the Energy Market

Liberal Eye is feeling ever so slightly smug today.   The House of Commons Business and Enterprise Committee has been grilling the bosses of the big energy companies about rising prices and concluded as I blogged last week that the energy market is simply not working properly.  Its Chairman, Peter Luff, was all over the media yesterday with their conclusions – click here or here (audio) for details.

The MPs agree that there is no evidence of price collusion among the big six energy suppliers but note that it’s easy for each to predict what the other five are going to do on price and conclude that:

It is clear that there are very real problems in the energy markets at all levels … which need to be addressed.

In particular they are concerned that the established players are preventing new competition emerging, that UK consumers are paying more than those on the Continent and that there is a massive disparity between prices charged to those in fuel poverty (most of whom are apparently on quarterly credit tariffs and NOT on pre-payment metres) and an affluent minority who can afford to pay by direct debit.  Both Ofgem and the Government come in for sharp criticism.

In short, the MPs could hardly be more damming.

Liberal Eye notes that if you plan to take over British Energy for £12 billion you must have a pretty clear idea of how much you think its future earnings are worth and this in turn depends on future prices.  So if  two energy companies are jointly negotiating to take over a third there must have been a great deal of sharing of thoughts on prices.  This is sailing perilously close to the wind.  (The definition of a cartel is what precisely …?) 

At first glance this is the sort of story that a headline writer might summarise as “Small earthquake in Westminster – no-one Injured” .  However, this would be to wholly miss the real significance of this story.   The headline should read “Small earthquake fatally undermines dam foundations – creates crisis“.  The reason?  The Labour Government, like the Conservatives before them, have put their faith in creating competitive markets in the industries they privatised.  The market would, they promised, keep prices competitive and through its ‘dead hand’ protect the public interest with just the lightest of light-touch regulation to keep things on the straight and narrow.

This plan has now palpably failed and the market fundamentalists’ delusion stands exposed as a fallacy nearly 30 years after it became the dominant economic meme in the Thatcher/Reagan era.  That is why I regard the emergence of these problems in the energy market as fundamental.  It undermines the very foundations of the ‘market fundamentalist’ cognitive policy that has shaped politics over the last 30 years.  (In passing it’s worth noting that similar issues exist in other sectors – banking, retail, public transport etc.  The public are again the losers paying greatly over the odds for most of what they buy).  The Government will, of course, soldier on trying to patch and mend as they go but it will be to no avail.  It is effectively impossible for a Government to change cognitive policy mid-term so we must wait for a new one.

So here’s a prediction: whichever Party first manages to articulate a convincing alternative to market fundamentalism will sweep all before it.  But will this be the Conservatives who like to think they understand economics (but got us into this mess in the first place) or the Lib Dems who tend not to like to think about economics at all (thus securing their record as easily the most unsuccessful Party of the twentieth century)?

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