The government should reconsider plans to further interfere in the domestic energy market, argues the Institute of Economic Affairs.
The think tank’s energy analyst Andy Mayer told City A.M. the current spike in energy prices is “rooted in the government’s interventions in the energy market.”
He criticized Downing Street plans, first reported in The Financial Times, to soften the blow for UK households by handing energy suppliers public money whenever wholesale gas prices rise sharply from market shocks.
Under proposals being weighed up by the government, energy firms would be supplied with public funds when wholesale prices exceeded a threshold, to prevent price hikes from being passed on to consumers.
The measure, known as a temporary price stabilization mechanism, could potentially be self-funding as energy companies would have to return money to the government when wholesale prices traded below the agreed level.
However, this would be dependent on energy prices declining, as it would otherwise leave taxpayers exposed to higher costs from propping up suppliers.
Mayer said: “More intervention is not a solution and will make these problems worse. This policy is a mask when what the market needs is a vaccine.”
Instead of introducing more measures to control the market, the IEA analyst suggested that the UK should give the green light to new developments in the North Sea and support onshore fracking, which would help shore up the country’s energy supplies and potentially contain soaring prices.
He concluded: “Addressing neither error while introducing a hidden price cap, will further damage competition and ensure that taxpayers are exposed to higher costs for longer. The main winners will be financiers supporting wholesale hedging contracts, not the public.”
This outlook was largely shared by the IEA’s economics fellow Julian Jessops.
While he acknowledged there were “no easy or cheap ways to keep energy bills down”, Jessops felt the so-called price stabilization mechanism had two main flaws.
Firstly, he questioned why the taxpayer should bear the risk of price fluctuations when “market incentives can only work properly if risks are shared by consumers and suppliers”, and he also said the scheme would prevent consumers from benefitting from future price falls.
He added: “The proposed mechanism is described as ‘temporary’ and ‘self-funding’, but it cannot really be both. For the taxpayer to get their money back, the scheme would need to be in place for a long time. And during this time, suppliers would have to pass any savings from lower wholesale costs to the taxpayer rather than to customers.”
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