UK Energy outlook – the Labour Party threatens to freeze prices

So at the UK Labour Party conference last week, Ed Milliband announced that if Labour wins the election in May 2015, they will freeze energy prices for 18 months.

This drew a number of broadly predictable reactions - delight from many members of the public, who have seen salaries rising more slowly than prices, and are faced by rising energy bills and endless media stories about fat cat energy bosses. Horror from those bosses who have threatened that the lights will go out and energy firms will close or move to other countries.

Milliband's broader theme, that the vast majority of UK citizens are not benefiting from any economic recovery, whilst a few get richer and richer, may I suspect have a strengthening resonance up to the election. The inequality in countries like the UK and the US has grown significantly in recent years, and it can't go on like that forever - so the attraction of Labour's position is clear and has some political merit.

But is a price freeze workable? Evidence from around the world, as well as historical experience in the UK, is not positive. Policies to control prices and incomes in the UK through the 1960s and 70s were generally ineffective and led in part to the Thatcherite movement and Labour's long period in the 1980s and 90s wilderness. And more recently, the example of toilet rolls in Venezuela is relevant - price freezes there led to shortages and the army taking over a toilet roll factory!

Whilst there may be an element of exaggeration in what the energy bosses are saying, there's no doubt that investment, badly needed in the UK's energy generation sector, is less likely with this sort of uncertainty around. And smaller firms - just the sort we need for a competitive energy market - are genuinely worried that they can't take the hit if wholesale prices rise and they can't respond with their own price increases.

What about procurement issues - what might this mean for corporate buyers of energy? For instance, what if a corporate has a contract in place already with a supplier that runs through to 2015? If that contains provision for price rises, perhaps based on a pricing formula, will that be allowed under the control regime?

And if energy shortages are a potential outcome from this policy, how can corporate buyers mitigate that risk? What actions can be taken now that make it less likely the organisation's lights go out, production lines stop rolling, or servers crash sometime around January 2016? More to add to that supply chain risk register!

So, we'll keep an eye on this and I'd love to hear from anyone who is closer to this market than I am - any tips for the worried category manager?

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