Energy costs are skyrocketing. The UK wholesale energy market has reached record highs with international gas prices surging as depleted reserves meet increasing demand from a post-lockdown reopening of world economy. In the UK, most consumers have not yet felt the brunt of the price increases, as they are protected by fixed rate deals or a government imposed price cap, which is reset every 6 months and protects even those on standard variable tariffs. Unable to pass on higher costs to consumers, the energy suppliers are struggling. As of the end of the September, 9 suppliers have ceased trading, though so far the bankrupt companies supply less than 1% of the domestic consumer market. What can be done?
Luckily there’s a simple solution; basic economics tells us the answer. As the saying goes, ‘the best cure for high prices is high prices’. What this means is of course that high prices send signals to both the demand and supply side of the economy. On the demand side, consumers prioritise consumption and substitutes for other similar goods. This may mean turning off the heat in little used rooms, closing the windows or cycling to work. The supply side also reacts. Higher prices attract more capital to the industry, expanding capacity and increasing supply. As demand falls and supply increases, prices eventually drop to a sustainable level. In this way the free market directs resources (energy and capital) to where is does most good and away from less essential uses.
Unfortunately, the market is not being allowed to work. Having largely created the problem in the first place by imposing levies and taxes on the energy sector and banning fracking, the green agenda will prompt the government to respond with more of the same on the supply side in a futile attempt to meet Net Zero and ‘consumer protection’ measure on the demand side, making sure that supply is lowered even further and demand is not impacted. Expect energy prices to stay high.
Politicians cannot solve the energy price crisis because the only solution is to keep politics out of the free market. By applying more of the same measures which created the problem in the first place, politicians can only make it worse. Anyone with an economic degree can understand that.