A brief comment on the energy price debate

Over the past few weeks, a barrage of double-digit energy price increases announced by major providers has attracted condemnation from politicians and the media. Price increases put pressure on the real value of wages and threaten to increase levels of fuel poverty incurring significant social costs in the form of adverse effects on physical and mental health. These problems also raise concerns about equality as the pinch of rising energy prices is often felt most severely by society’s most vulnerable. For these reasons, energy affordability is high on the political agenda – and rightly so – but to me, the present fixation on low energy prices is problematic.

Although recent price rises have been met with a sense of indignation, the UK enjoys energy prices that are well below the EU average (see below). From an economic perspective, low energy prices reduce incentives to improve energy efficiency and invest in substitute technologies such as renewables – both measures that are integral to the process of green transition. Low prices also constrain energy company profits that are essential to financing much-needed investment to improve the UK's energy infrastructure.

It appears that present political efforts to secure fuel affordability are set on tackling fuel prices but I would argue that this approach is unimaginative and will impede progress toward achieving a green transition. Rather than seeking to keep prices low, an alternative approach to ensuring fuel affordability would attempt to increase low incomes. As well as general macroeconomic and industrial policy to encourage the creation of skilled manual jobs (the sort of employment that provides middle-income salaries), more specific measures would include fuel energy subsidy payments to the low-waged and un-waged. Such an alternative approach would allow energy prices to rise, providing the incentives that any green transition will need, while mitigating the most significant social costs.

To further address the social discontent that energy price increases with inevitably cause, politicians could also take steps to ensure that energy company profits are also being used to fund socially beneficial investment. Despite enjoying considerable profits, energy firms are investing less in new assets to improve the UK energy system than the value of depreciation of existing assets. If this trend continues then a furore over future price hikes would be justified. It would be far more constructive, however, to act now and use the regulatory system of the UK energy market to demand energy companies increase levels of investment.

Fuel affordability and securing a green transition are both undoubtedly important issues, but the present political emphasis on energy prices imposes an artificial trade-off between the two. Although this trade-off can be overcome through the pursuit of more imaginative and ambitious energy-affordability policies such as those discussed above, the problem with such alternatives is that they are more complex and harder to achieve than a seductively simple energy price freeze. In order to achieve a socially and environmentally sound energy market it is vital that British politicians don’t let fear of complexity compromise the quality of policy.