How Labour’s energy price cap helped ruin Thatcherite reforms
Surviving architects of privatization point to a series of interventionist policy mistakes that they say distorted the market, undermined competition and led to an explosion in the number of suppliers – followed by a cascade of failures and the continued collapse of the industry. This results in higher costs for the remaining companies and their customers.
George Yarrow, former non-executive director of the Gas and Electricity Markets Authority and now chairman of the Regulatory Policy Institute, says the private market got off to a good start as the 12 regional power monopolies “engaged a fierce competition to develop”.
A key tactic was to enter new territories with lower prices than the regional incumbent.
“If you look at the early period, from about 2002, when deregulation was pretty much complete, until 2007, the market was operating very competitively. Margins were very tight at that time and there was competition among incumbents,” says Yarrow.
He argues it started to go awry when additional grant-like support came along to encourage new suppliers: “It’s led to all the bankruptcies today.”
According to Yarrow, rules still in place to ensure that households will not be left without electricity if their supplier collapses, encourage new companies to offer very low prices and attract customers, without acknowledging the risks of their model.
But if they collapse, other companies – and their customers – have to pick up the tab.
“Small suppliers are, certainly in the start-up phase, more risky,” he says.
“There has been excessive encouragement of small suppliers. They can do well in good market conditions when prices go down, which they were at the turn of the century. But when times get tough, they are inclined to take more risks.
For example, Octopus Energy started taking customers from Avro Energy after the small supplier went bankrupt in September 2021.
Risky behavior got worse in 2009 with new rules, Yarrow says. Competition was based on price “discrimination”, offering new customers lower bills than existing customers.
Regulators and then politicians – he calls then-energy secretary Ed Miliband “the prime culprit” – questioned and then blocked the practice.
This “destroyed competition between the Big Six [consolidated from the 12 through the 1990s] and Centrica,” says Yarrow, which has led to additional demand for new companies to join the market and cut prices from larger competitors.
Those close to Miliband admit the surge in new entrants spiked in 2011 and 2012, after the coalition government took over, but argue further mass market entry has not happened under his direction.