Groucho Marxism

The energy regulator for Great Britain, Ofgem, has just announced that it will raise the energy price cap by 2% from October. But what exactly is the energy price cap? Actually there are four energy price caps: one in pence per kWh and one in pence per day, for both gas and electricity. These represent the maximum amounts that suppliers can charge you for each unit of energy you use, or for each day that you use energy. They are all going up by 2%, which means that suppliers will be able to charge you 2% more for your energy from October. This may not sound a big increase but it comes off the back of huge increases in energy prices over recent years: according to data published by the Department for Energy and Net Zero, domestic energy bills in the UK have increased by over 50% on average since 2020.

So why has Ofgem done this? According to them, it is because of increased wholesale gas and electricity costs. And in fairness to Ofgem, these costs do seem to have gone up slightly in recent months. But this does raise the question of what the point of having a price cap is if it isn’t fixed but is instead tied to wholesale energy costs. Ostensibly the point is of course to prevent suppliers from charging too much for energy bills; but in making the price cap dependent on wholesale costs, Ofgem is effectively ensuring that whenever these costs go up, it is the public that has to foot the bill rather than the suppliers. Thus, although the cap is supposedly there to protect consumers, the way it is set means that it ends up protecting suppliers’ profit margins instead.

In fact the very existence of the price cap is a tacit admission that a privatized energy system doesn’t make any sense. The unspoken implication is that if the price cap wasn’t there, energy suppliers would charge even more for the energy they supply by applying even bigger mark-ups to wholesale costs. But the whole justification for having a market-based system is that it will be better for consumers, as competition between suppliers will lead to increased efficiencies which will drive prices down! By this logic, there should be no need for the price cap, which is effectively a kind of price control; instead, we should simply be able to let supply and demand work its magic and reduce prices for the consumer. But as Ofgem and everyone else knows, in practice that just won’t happen.

This leads to the question of why we have a privatized energy system at all. Even if you accept that energy bills need to be tied to wholesale energy prices, why should they also have an additional profit margin slapped on top of them? This wouldn’t be necessary if energy was provided by the state. As already noted, the usual justification that a market-based solution will drive down prices doesn’t hold here. In fact it doesn’t hold for any service that relies on fixed infrastructure, as fixed infrastructure creates what economists call a ‘natural monopoly’. This is why, for example, privatized air travel results in cheaper airline tickets, but privatized rail travel does not result in cheaper rail tickets (quite the opposite in fact).

In reality, the reason we have a privatized energy system has nothing whatsoever to do with increasing efficiency, reducing costs, or any other of the phoney reasons usually put forward by neoliberal zealots. The reason, of course, is that it allows the ruling class to cream off additional profits at the expense of ordinary people, thereby providing another mechanism through which capitalists can exploit workers. In fact privatizing the energy system is particularly lucrative because, as any physicist will tell you, you can’t do anything without energy. As the economist Steve Keen puts it: labour without energy is a corpse. If energy prices go up then people basically have no choice but to pay the additional amount; it’s either that or freeze to death.

The government would probably argue that even if it were to nationalize energy, prices would still need to be based on wholesale costs, which are set globally and are therefore not within the UK’s control. But this is only so because the UK is heavily reliant on imported gas to meet its energy needs, which in turn is a result of policy decisions made by this and previous governments. In fact in the UK we are in the bonkers situation where gas plants set the price for all electricity on the grid – even if that electricity is generated from renewable sources! This is due to our ’marginal cost pricing system’ where the price of electricity is set by the most expensive source needed to meet demand at any given time, which is typically gas-fired power plants.

So under the existing framework, switching on mass to renewable energy sources would not result in price savings for the consumer, even if those renewable sources were entirely within the UK. This is particularly infuriating when you consider that it is now generally a lot cheaper to generate energy from renewable sources than it is to generate electricity from fossil fuels. Both wind and solar can now generate electricity at a cost of £40-£50 per MWh, whereas the  cost of gas-fired generation has increased to around £124 per MWh. Why don’t we simply get rid of the marginal cost pricing system then? Because it’s yet another profit-generating device. Until we remove the profit motive from our energy system, our energy prices will only continue to rise.