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on Sep 26, 13 • posted by rhoggett •

New Thinking Blog: The Freezing Gamble – Corporate and State Power in the UK

The Freezing Gamble – Corporate and State Power in the UK

Caroline Kuzemko, IGov Team, 26th September, 2013

About Caroline: http://geography.exeter.ac.uk/staff/index.php?web_id=Caroline_Kuzemko

Twitter: https://twitter.com/CarolineKuzemko

Ed Miliband’s plan to freeze electricity prices for 20 months is an out-and-out electoral gamble. Labour researchers have clearly picked up on the social issue of rising energy costs and are using these concerns for electoral gain – rumour has it that focus group approval ratings for the price freeze were ‘off the scale’. But there is another question at stake here – that of power relations between the big six energy companies and UK energy policy and regulatory institutions. This relationship, and how it is conducted, may well now lie at the centre of the next electoral campaign and Ed Miliband’s speech draws, for the first time in about 18 years, a dividing line between Labour and the Conservatives on this issue. Labour are starting to say that they are pro-small and medium sized business – budding entrepreneurs and hard working families – leaving the Conservatives, as habitual, to represent big business. George Osborne is standing up, yet again, for the City by threatening to legislate against new EU laws that would cap bankers’ bonuses and this now plays into Labour’s hands in terms of how they have just defined this electoral campaign.

The freezing gamble is currently playing to Labour’s favour – a YouGov-Sun poll taken on the evening after Ed Miliband’s speech shows Labour with a 9% lead over the Conservatives – from a 5% lead before the speech. The question is whether the big six and the Conservatives can successfully ‘defrost’ energy prices by causing voters to worry that Labour will either not be able to freeze prices or, if they do so, the result will be blackouts. However, the way in which Labour have drawn the battle lines cleverly makes the big six and the Conservatives into an alliance that appeals together to energy security fears. They are, so far, signing to the same tune of blackouts and stunted investment.

Big six energy companies are claiming (loudly) that this will dent their profits and prevent them from investing the considerable sums required to rebuild the UK’s aging energy infrastructure (note very little mention of the need to decarbonise this system). We can unpick these claims a little here. A 20-month price freeze may not in itself make much different to commercial decisions to invest. Even if a company decided to build a new CCGT plant today it wouldn’t be operational until 2016 and energy companies expect to amortise investments over 5-10 years. Furthermore most of the big six have recently been making good profits – so much so that some have paid bonuses in the many millions to senior execs and board members. The big six have the ability to pay out some of the most generous dividends available to shareholders – E.ON’s dividend yield is particularly high at 7.8%. Companies that pay out high dividends are, ostensibly, not re-investing available profits in their business and instead chose to keep shareholders onside with regular payments. One gas and electricity company claims that their strategic priority is sustained real dividend growth.

Surely this is irresponsible given the investment requirements for rebuilding and decarbonising our nation’s energy system? What this highlights is the way in which the current design of our energy system and policy works to the detriment of delivering on climate change mitigation, energy security and affordability goals. The privatised energy market has been designed in such a way that energy companies must be economically viable – they need to be able to make a profit and sustain a healthy investor base in case they need to raise future equity capital. The primary objective of profit maximisation, and keeping shareholders happy, basically prevents energy companies from acting for the common good and delivering climate change mitigation objectives. Under the current political model DECC and Ofgem have few resources, little ability to change the system, little access to energy market data, and have to rely on energy companies to implement energy policy. If this is what Labour are looking to intervene in, if they genuinely want to fix this dysfunctional market then I won’t be the only one welcoming change.

There are clearly a great many unanswered questions about the proposed energy price freeze. However, whether Labour’s plans are doable or not and whether they will work or not the positive outcome of Ed Miliband’s speech is that the question of energy companies, embedded corporate power and political influence is now well and truly out there for debate. Even Russell Brand has written recently, and to much surprised applause from readers, on the relationship between Conservatives and energy companies. Is energy at long last going to be a subject for election campaigns in the UK? If so the Conservatives will, citing energy security, continue to come down on the side of big business – marking out territory in a way that will be increasingly overt to voters. One thing Ed Miliband seems to be getting right is illuminating where Labour, as opposed to New Labour, now stands with regard to big businesses that have little consideration for the common good.