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HENDRY Charles

Charles Hendry is MP for Wealden and a former Energy Minister

In one speech, Ed Miliband has turned the UK’s energy crunch into something much worse.

An energy crunch is looming in the second half of this decade, largely because of the failure to secure sufficient investment in the UK’s ageing electricity infrastructure over many years to replace the UK’s ageing plant. Miliband must take his fair share of the blame for that, for failing to put in place the measures which would attract new investment when he himself was Energy Secretary.

With new investment coming in, a crunch probably doesn’t mean power cuts but it probably does mean shortages – during which prices for some industrial users will spike and others on ‘interruptable contracts’ (in return for lower tariffs) will be asked to go offline for a few hours until the crunch has passed.

Yet now, in one single sentence Ed Miliband has made it one whole lot harder to get that investment.  It is a rare case where the words of the Leader of the Opposition have actually undermined the policies of the Government of the day.

Miliband’s price freeze would do several things but most of them harm consumers rather than help.

There will be less new investment. Energy companies need to borrow to finance their investments.  The value of those companies has fallen as a result of Miliband’s speech so their ability to borrow, which is linked to their capital value, has fallen too. The likelier a Miliband government looks, the more constrained they will be.

The cost of building the new infrastructure will go up. There is a new degree of political risk. A price freeze means that investors will be less certain that they will make a return on their investments, so their cost of borrowing will go up to compensate. The UK needs over £100 billion of new investment and if the cost of greater political risk is just an extra one per cent on the cost of borrowing, that’s an extra £1 billion a year in interest payments alone. So Miliband’s comments will actually push up bills!

And in a spectacular own goal, it will be low carbon energy projects will be most affected. Nuclear and renewables have relatively higher capital costs, but lower running costs, than gas.  Projects with higher capital costs and longer payback periods will be the hardest to finance.

Miliband seems to have forgotten two main points.  Price rises in recent years – starting when he was Energy Secretary  – have mostly been because of rising global wholesale gas prices.  In one year alone, they rose by over 30 per cent.  After the disaster at the Fukushima nuclear plant and with constant unrest in the Middle East, such rises are not surprising, and he is deluding himself if he thinks that government dictat in the UK can completely insulate people against such rises.

And he forgets that most energy companies are international companies with the option to invest wherever they want.  People may wish it was otherwise, but that concentration into a small number of overseas companies actually happened whilst Labour was in government, and it has been this Coalition Government which has sought to increase competition.

There is no requirement for those companies to invest – or even to stay – in the UK. Most of them have lower levels of profits here than in other markets, so today in those boardrooms in Germany, France, Spain (and even in the UK) they’ll be scratching their heads and asking why a Labour government would really want to drive them away.

This Government has done more than any other to create the right climate for investment, to focus on energy security, to achieve a step change in energy efficiency and to help consumers get the best deal – all of which are policies designed to protect consumers and to keep prices down.

Of course, continuing reforms are needed (and are happening), but policies which drive away investment ultimately hurt consumers.  So in five years time, when that crunch is upon us, never forget that it was Miliband’s inaction in Government and his action in opposition that made it worse.

41 comments for: Charles Hendry MP: How Miliband’s energy plan will harm and not help consumers

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