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Home / Tim Worstall /It was never sensible to implement the worst part of California’s deregulation

It was never sensible to implement the worst part of California’s deregulation

Summary:
Other peoples’ mistakes are opportunities to learn. Opportunities to learn what not to do of course. Every “Hold my beer and watch this” is a teaching moment.The big mistake made in California’s deregulation of the electricity market was to insist that wholesale prices could and would vary with the more general market but that retail prices could and would not. This baked into the system the risk that price volatility would bankrupt all of the retail suppliers and that’s what duly happened.We now have UK retail suppliers toppling like ninepins and why is that?Ofgem has opened the door to a major relaxation of energy price cap rules which would expose millions of households to the risk of sudden price increases.The regulator signalled it was considering a review of how the energy price cap

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Other peoples’ mistakes are opportunities to learn. Opportunities to learn what not to do of course. Every “Hold my beer and watch this” is a teaching moment.

The big mistake made in California’s deregulation of the electricity market was to insist that wholesale prices could and would vary with the more general market but that retail prices could and would not. This baked into the system the risk that price volatility would bankrupt all of the retail suppliers and that’s what duly happened.

We now have UK retail suppliers toppling like ninepins and why is that?

Ofgem has opened the door to a major relaxation of energy price cap rules which would expose millions of households to the risk of sudden price increases.

The regulator signalled it was considering a review of how the energy price cap works after turmoil in the industry triggered by a surge in wholesale prices.

The cap prevents energy companies from immediately passing on higher costs to their customers, forcing many suppliers to the brink of bankruptcy.

Several companies have pushed for a review of the cap, arguing they cannot survive a six-fold rise in wholesale gas prices and four-fold rise in wholesale power prices without being able to pass on more to their customers.

The cap's level is only reviewed twice a year. However, Ofgem is understood to have ruled nothing out in a review of the cap, including how it is calculated and how frequently it can be adjusted.

The obvious answer is that the price cap should be recalculated more often. In fact, it should operate in real time - that is, not actually have a price cap at all.

The background point here being that prices are information. If that wholesale price is rising then we do desire that retail consumers use less power. That’s what the price rise is telling us should and needs to happen. So, insulating consumers from that information is the wrong thing to be doing.

Price setting is a bad idea in itself. But setting retail prices while leaving wholesale free will - and it is will, eventually - bankrupt those who buy wholesale and then sell retail. As is happening.

Leaving us with only the one mystery, why did people decide to copy that worst part of the earlier disaster?

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Tim Worstall
Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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