A joke for Labour
party leader Ed Miliband: How many electricity regulators does it take to
change a lightbulb? Answer: just one but it has to want to change. Not
laughing? Well, it is no laughing matter.
Labour has stated that it would
replace the current body Ofgem with one which would force utilities to cut
prices, as necessary. On Sunday, Mr Miliband reiterated his threat to mandate
price cuts. His plan would help consumers in the short term, but would hit
utility company profits hard enough to discourage investment.
Since late November,
the
UK
natural gas price has dropped 18 per cent, following a warm start to
winter. This has directly affected the wholesale power price. Natural gas
fuelled electricity represents over a quarter of
UK
power generation. Wholesale power prices in turn have fallen 28 per cent. This
at a time when investment is badly needed. Spare generation capacity is limited
- as low as 4 per cent, National Grid says.
Despite declines in
key input prices (coal is also down over the past year, by a quarter) energy
utilities will not cut their tariffs much. Some have locked in their purchases
of gas, coal and power. SSE, for example, has already purchased 85 per cent of
its power and gas needs for next year. They will not be able to take advantage
of declines until the hedges roll off. So SSE's bold promise last year to
freeze its tariffs until 2016 no longer looks so appealing. Slashing tariffs
would hurt. Its shares lost 6 per cent on Monday.
At least SSE's shares
have had a good 12 months. Pity Drax, the
UK
coal-fired generator. Though it has attempted to convert as many of its six
plants to renewable biomass (wood pellets) as possible, plans for the fourth
conversion have been slowed by a government rethink on subsidies. Centrica has
a different problem. Years ago it chose to invest in gas extraction, most of it
in the
North Sea
. Lower gas prices should go straight to its bottom line.
Encouraging the
regulator to force down electricity prices in the
UK
makes noise but adds little light. What is needed is a focus on adding
efficient new capacity.