Energy price cap a bad way of lowering prices

Philip Booth writes for The Independent

Two experts give their view on Labour's plans for lower energy prices

For: Reg Platt

IPPR Senior Research Fellow

There are four main criticisms of Ed Miliband's pledge to freeze energy prices until January 2017 if he was elected in May 2015. The first is that it will make the energy companies uneconomical to run, risking their collapse. Second, that the energy companies will hike their prices before the freeze is introduced. Third, that it will reduce the investments the companies make in new energy supplies, risking shortages and blackouts. Fourth, that the policy heralds a return to "70s-style socialism". The first three criticisms are little more than scaremongering. The last point is fundamentally wrong.

Against: Professor Philip Booth

Editorial and Programme Director at the Institute of Economic Affairs

Economists tend to agree that, if you wish to lower the price of something, then a price cap is the worst way to achieve the objective. The UK private rental market was decimated by rent controls; perhaps more pertinently, Californians sat in the dark because of their own version of Miliband's proposed energy market price caps.

If suppliers cannot profit from selling energy, they will simply stop supply. They will withdraw from the market, stop investing and erode their services in other ways. Furthermore, political interference in the market raises the risk that energy suppliers face when choosing whether to invest. More interference means less investment or a higher required return on investments – in the long term this feeds into prices.

Read the full article here

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