Oil price plunge leads to coalition tensions – a sign of things to come?

By January 21, 2015EU insight

By Neeraj Shah, Consultant, London

The cost of energy has never strayed far from the headlines in recent months but the latest bout of forensic coverage has been inspired not by Miliband’s fabled price freeze, but by the steep fall in the oil price. As the oil price has collapsed, so too has the wholesale cost of gas. Such a  dramatic price event has simultaneously elicited hastily-made explanations about their hedging strategies from the Big Six and demands from Parliamentarians and consumer groups to pass the ‘savings’ on. 

Furthermore, recent efforts from the Chancellor to apply pressure on energy companies (and airlines) to cut bills appear to be working. Last week the Prime Minister signalled his delight at Eon’s price cut and this week has seen another two energy giants follow suit.

E.ON was the first of the big six energy companies to bite the bullet and cut its standard tariff by 3.5% effective immediately and this decision certainly caught the rest of the big six by surprise. British Gas was next to follow – with a decision to reduce prices by 5%. Today saw Scottish Power join the gang with a reduction of 4.8%. . Pressure is now firmly on the rest of the big six to join or be condemned by the Government, Labour and bill payers alike.

The story is interesting however as the Chancellor’s briefed the Cabinet on the implications of falling oil prices, tweeted that it was “vital” that these were passed on to families and told Cabinet colleagues to “watch like hawks” to make sure that consumers enjoyed the full benefits of lower oil prices. Ed Davey, the Liberal Democrat Energy Secretary then used an interview in the FT to criticise Osborne, arguing that he did not know what exactly he was proposing and that such criticism of energy companies by politicians would “damage markets, investment and our economy”.

Davey told the FT that he had asked the Chancellor to tell him more about his plans and how it fits into the Competition and Markets Authority (CMA) investigation (the “premier” investigation as Davey put it), launched in June 2014 after Ofgem decided to refer the energy market to the CMA. The CMA will publish its final report by December 2015 and investigate whether there are any features of the market which prevent, restrict or distort competition and what action might be taken in response.

Such spats are only likely to increase between now and the General Election. It’s safe to say that Coalition colleagues, regardless of seniority, will increasingly fracture along party lines. This is not to say that the Coalition will split before the election – that, on the face of it, seems improbable. The Chancellor’s interjection reeked of electioneering but also came in advance of last Wednesday’s Opposition Day Debate on energy prices, in which Labour proposed, but were ultimately defeated, that new powers be given to Ofgem to force firms to pass on savings. It may, however, point to wider disarray within the Coalition Government over how exactly to respond to Labour’s campaign for lower energy prices which is set to be a central plank of Labour’s election campaign.