It is beyond time to start implementing price controls on energy products. We have a few months left before the winter and another big price increase. To those who claim that ‘price controls don’t work’, look at France.
France has one of the lowest inflation rates in Europe: 5.8 percent annually up to May, compared to an EU average of 8.8 percent and an Irish rate of 8.3 percent. A big explanation for this is a series of energy price controls they have introduced – on both electricity and gas.
France has been putting pressure on the EDF, the main electricity supplier (which is owned by the State) to keep price increases close to production costs. In April they imposed a 4% price increase cap while freezing gas prices since November last year. These benefit a high proportion of households and business.
Variations in pricing are not wholly down to price controls. Other measures that reduce costs may also be at play (e.g. VAT reductions). But price controls have played a key role.
- France is not the only country to intervene in the pricing of energy products. The OECD charts the range of measures that countries are taking. These include price support measures: price controls, reduced electricity charges and network fees, VAT and excise tax reductions, and compensation to distributors for selling energy products at reduced prices.
- Malta has mandated the state-owned provider to freeze prices at their 2014 level which means a 0 percent increase in electricity and gas prices over the last year. They compensate the provider for the losses the price cap has brought about.
- Portugal and Spain are introducing electricity caps which are estimated to cut electricity prices by 50 percent to about 40 percent of the population.
- In Hungary, electricity prices fell by 21 percent with gas prices falling by 17 percent owing to the introduction of price caps.
A number of other countries have intervened in the pricing of energy products through various mechanisms.
In Ireland, there has been tentative discussions regarding price controls or caps. Back in September of last year the Tánaiste addressed this issue:
‘Maximum price orders will be considered by Government to halt galloping gas and electricity costs, the Tánaiste has told the Dáil . . . Mr Varadkar said: “We’re not going to rule out using maximum price orders.” ‘
What is the follow-up to that ‘consideration’? What did the Government conclude? What study did they undertake? Have they published it? Will they publish their findings?
Apparently, the Minister for Finance has been looking into excess profits in the energy sector.
‘I am aware that the European Commission has confirmed that EU member states can consider imposing temporary tax measures on windfall profits of energy providers and use the revenue generated to provide consumers with relief from high prices. Officials in my Department and the Department of the Environment, Climate and Communications are evaluating the potential for such a proposal.’
Of course, it would be far better to remove excess or windfall profits through price regulation rather than taxing it. A tax allows companies to retain a large portion of the profit.
There are a number of forms price regulation could take.
- The simplest way would be to introduce a price cap. However, this must be finely calculated; otherwise, retailers and generators could exit the market (though this threat can by over-played at times).
- Reducing prices to the average profit margin prior to the crisis would allow for companies to maintain a profit but ensure that no one is benefitting beyond the historical norm.
- Reducing prices to the cost of production would mean that companies would have to temporarily forgo profits but, again, care must be taken that companies don’t suspend investment or be prevented from increasing employee wages.
- The price of electricity and gas could be standardised for the duration of this emergency (some companies offer the same product – electricity or gas - at price differentials of €400 per year, depending on the 'plan’).
- The Regulator could draw up a tariff schedule that benefits low-users of energy. For instance, the average household consumes 4,200 kWh per year of electricity. Prices on the first 25 percent (or 1,000 kWh) consumed could be significantly reduced. If consumption is related to income, this could benefit lower-income households.
Other measures could include reducing for a period transmission and distribution tariffs to the network, ensuring the savings is passed on to the consumer.
If the state were to intervene in market pricing, it would need to be clear about its objectives. It is not, in the long term, about suppressing fossil-fuel energy prices. These prices will rise given the transition to renewable energy sources. The objective is to smooth out spikes to provide certainty to consumers and protect them from high prices during periods of high demand. It is further intended to ensure that no one profiteers selling a public good.
The first step is to acknowledge the principle that energy prices should be regulated (in Slovenia they are debating price controls on petrol); that energy is a public good, vital to the functioning of a productive economy and household welfare.
Once we have accepted this common-sense proposition, we can figure out the best way to achieve that.
And the great thing is that we don’t need an emergency budget to introduce price regulation. So what’s the hold up?
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