A marketing ploy

Tweet Miliband’s pledge to freeze energy prices if Labour are elected in 2015 is likely to prove popular, even if the policy seems to be unravelling somewhat at present.  The squealing of the energy companies is likely to be more of a help to him than a hindrance.  Standing up to what is perceived to be an unpopular bunch of fat-cats is hardly an unpopular position to take.

I’m not sure how much of a promise it is though.  If elected in May 2015, and allowing a little time if legislation is required (and I rather suspect that it is) a freeze until the start of 2017 is about 18 months, slightly less than the 20 being bandied about.

Many of the energy companies already offer customers fixed price deals for periods of 12 months at a time – extending that from some customers to all customers and from 12 months to 18 months doesn’t look like the big deal both the energy companies and Miliband are making it out to be.  That’s particularly so if we consider the way in which they achieve their fixed prices.

The price per unit for fixed-price customers is set at the level which the energy companies believe that they can sustain over the period concerned.  As a result, that price may be higher than it needs to be at the start of that fixed period – and lower than it would otherwise be at the end.  “Fixing” prices is not something that they do generously out of the goodness of their hearts – it’s a marketing ploy which they calculate will not adversely affect their profitability over the long term.  By giving almost 2 years' notice of intent, Miliband has given them time to ensure that the base price, at the start of the fixed price period, will be where they think they need it to be. 

Paradoxically, the promise to guarantee no increases for a set period in the future may just encourage higher price increases in the interim.  They won’t do it as openly as that, of course; they will merely take into account future expectations when they calculate the next price increases.  From a business perspective, that's a rational and prudent approach.  From Labour’s point of view it may even be good politics – it’s Cameron who will be blamed for the high prices in the interim – but it isn’t necessarily good economics or good energy policy.

And even if the energy companies don’t simply implement a pre-emptive price increase in advance, they will recover their position after the freeze period.  The only thing of which we can be entirely certain is that, over the long term, a period of frozen prices will not affect their overall profitability – they’ll get our money from us somehow.

The reason given by Labour for this policy is the most depressing aspect of all this.  The “markets are broken” they claim, and the period of frozen prices will give them time to fix them before competition is allowed to run free again. The underlying assumptions are firstly that the markets can be fixed, and secondly that if the market operates properly all will be well.  Would that life were so simple.  Politicians who were serious about controlling energy prices would never expect the free market to deliver that policy for them.  Politicians who were serious about tackling the high profits and fat-cat culture of the energy companies wouldn’t just be talking about a very short-term price freeze.

For all the hype, Miliband’s statement ends up looking like the fixed-price deals on offer in any event from the energy companies – it’s a marketing ploy; no more no less.  The only difference is that he isn’t marketing anything useful – only himself and his party.