How will Labour’s plans “to freeze energy bills until 2017” affect UK businesses?

The shadow energy secretary, Caroline Flint plans to “freeze energy bills until 2017, saving the average household £120, and reform the energy market for the future." (source 1)

But what would be the impact of this on businesses large or small?

Andrew Childers from Meercat Associates has this to say:

Energy is a pretty easy target for the government, especially a new cabinet that is looking to establish itself. Focus on an area of pain that transcends business and domestic society and then make a sweeping statement that prices are going to be fixed until 2017; the short sighted voter will see as a confident and positive act.

The more rooted issue is that the energy providers have more power than just volts. There have been so many issues over the years of them ripping off customers, it’s hard to keep count, and the average consumer has no trust in the industry at all.

We have seen fixed prices in the past, all offered at a premium. We are used to global events impacting and threatening oil prices and energy costs rising, yet when the threat passes our energy prices stay at the new higher rate. Every negative piece of media is a great excuse for the energy providers to increase prices again and we are helpless, if we don’t accept, tough, what are we going to do? We can’t change supplier as the industry controls have us tied into a legal contract, plus there seems to somehow be an industry wide agreement so the big 6 increase their rates by a similar amount so where can we go anyway?

Our core question:

Why does the government feel that prices need to be fixed until 2017? The answer I suspect is due to the fact that energy costs have soared over the past 5-10 years and profits for the energy providers have also soared as well.

The government is proposing to perform an intervention, which suggests they have identified a problem. To address the problem their vote winning, visible solution is to freeze prices and visibly push back.

My view is this:

If prices go up who wins? - The energy provider, as they will increase tariffs and profits.

If prices go down who wins?  - The energy provider, as they will lag behind the trend long before they lower their tariffs, consequently increasing their profits.

If prices are fixed who wins? Most likely the energy provider as they will fix prices above the market average to offset risk.  If energy prices increase over their fixed price, they will cut budgets to investment areas i.e. research, development, infrastructure, new builds rather than impact on stakeholder profit.   

The government should be focusing on ensuring the industry is controlled and managed effectively, ensuring that the consumer is given visibility of their costs, and freedom to change provider. If they ensure that the industry operates within the boundaries of healthy competition then there will be no need for government intervention.

But in the meantime, what happens to the small, medium and large businesses affected by the freeze?  Well the large companies are already receiving benefits from the energy companies and being rewarded for usage through economies of scale.  In 2012 very small companies were paying on average 12.99 pence per kWh and very large only 8.93 pence per kWh, with medium businesses in the middle at 9.17 (source 2).   Would the big six fix above the market average and then when prices go down, lag behind and massage their profits?  Would one small government department be able to face the 6 energy giants?  The freeze would affect businesses of all sizes and limit their ability to negotiate better deals.

The energy suppliers won’t proactively offer businesses reduced tariffs, but that doesn’t mean there aren’t still various fixed rate deals available, depending on the businesses usage: better deals for bigger users.  It will be harder to find the best rates and harder to negotiate unless you have real volume usage power, only available to the very largest companies/users.

At Meercat Associates we run the BID Buying Group, which is made up of 10,000s of businesses across the UK; this gives us enormous negotiating power at a time of energy prices rising or being frozen at a higher premium.  We work with BIDs and their members across the UK, negotiating better deals for them across energy, telecoms, insurance, waste management, security, printing… the list is long.  We cover pretty much any supplier or behind the scenes provider using our procurement expertise to agree the best deals there are on offer.  Our consultants monitor their client’s tariffs and ensure when renewal is due, the best rate is achieved.  We frequently manage to save BID members up to 50% on their energy tariffs; it’s gratifying to be able to make a positive impact on their bottom line, instead of the energy providers!

Andrew Childers is Managing Director of Meercat Associates ltd, BID procurement experts. 

Sources: 1. The Guardian, 21.8.14 ‘Labour unveils plans to crackdown on energy industry   

  abuses.

2. DECC survey of energy suppliers

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