Energy company warnings Britain could face blackouts if they are forced to freeze prices were dismissed as "scare stories" by Ed Miliband today.
The Labour leader wrote to the "Big Six" companies warning that they would face a consumer backlash if they fought his plans for a 20-month price freeze following the next general election in May 2015.
His surprise announcement at the Labour conference in Brighton yesterday was greeted with horror by gas and electricity suppliers, with predictions that firms deprived of the power to set their own prices would be in danger of "economic ruin".
Shares in Centrica – British Gas's holding company – were down almost 4 per cent in early trading, while shares in Southern Electric and Swalec owner SSE fell 3.6 per cent.
Centrica chairman Sir Roger Carr said: "We are all concerned about rising prices and the impact on consumers, but we also have a very real responsibility that we find supplies to make sure the lights stay on."
And Angela Knight, chief executive of trade body Energy UK, said that while the price freeze was "superficially attractive", it would "also freeze the money to build and renew power stations, freeze the jobs and livelihoods of the 600,000-plus people dependent on the energy industry and make the prospect of energy shortages a reality, pushing up the prices for everyone".
But Miliband left no doubt in his letter that he was ready to take on the energy giants, whom he accused of "overcharging" millions of consumers while failing to use their massive profits to invest in infrastructure.
The Labour leader wrote: "You and I know that the public have lost faith in this market. There is a crisis of confidence. We face a stark choice. We can work together on the basis of this price freeze to make the market work in the future. Or you can reinforce in the public mind that you are part of the problem not the solution."
Labour said yesterday that Miliband's plans would save the typical household £120 and an average business £1,800 between May 2015 and January 2017, at an estimated cost to the energy companies of £4.5bon.
The party is planning radical reform of the gas and electricity market to bring down prices, but the necessary legislation cannot be in place before 2017, with the freeze intended to protect consumers up to that date.
Miliband said a Labour government would be ready to use taxpayer guarantees to support investment, but told the companies: "It is my firm view that without resetting the market we are not going to see the public consent that is required to underpin the scale of taxpayer-backed guarantees for which you have argued.
"I am prepared to make the case for sharing the risks of such investment, but that must be against the backdrop of a market that customers believe works for them."
Challenged over industry claims that his policy could lead to the lights going out, the Labour leader told ITV1's Daybreak: "I would say that they are pretty unreliable witnesses, because these are people who are overcharging people, so of course they are going to say when someone calls time on it that they are not very happy.
"Then we have got the Government taking their side and saying the same thing, supporting the energy companies. That's fine, they can do that, but I am determined to make this change."
Liberal Democrat Energy Secretary Ed Davey warned that the Labour policy could result in a repeat of California's attempted restructuring of the energy industry in 2000.
"When they tried to fix prices in California it resulted in an electricity crisis and widespread blackouts," said Davey. "We can't risk the lights going out here too. Fixing prices in this way risks blackouts, jeopardises jobs and puts investment in clean, green technology in doubt."
But Miliband retorted: "There are bound to be people coming up with scare stories... California was a totally different approach. It was a deregulated approach, not the kind of approach we are talking about."
But Dr Monica Giuliett, who has studied the UK energy prices for 20 years and is part of Warwick Business School's Global Energy Group, believes the policy will not address the root causes of the market’s problems.
"A policy focusing primarily on price freezes is not likely to address the root cause of the lack of competitiveness in the energy market and it could actually create more incentives for suppliers to collude on prices while waiting for the price freeze, as several observers have suggested, therefore achieving the opposite outcome to the intended solution,” she said.
"In the last 10 years the main cost drivers in the energy markets have been mainly international factors such as the relative scarcity of alternative fuels in different geographical areas and international agreements on greenhouse gas emissions controls.
“To put a cap on prices without consideration for these external pressures is likely to challenge the energy companies’ ability to supply.
"One of the main reasons for the ‘market failure’ in the UK energy market, which Ed Miliband refers to, was probably the expectation that competition could be brought about by consumers actively looking for the most attractive deals and making informed choices about the cheapest deals available.
“Several investigations into the market, such as Ofgem’s energy supply market probe, have shown that this has not happened to a sufficient level to promote active competition in the market.
"However, research undertaken at Warwick Business School shows that the key to a fairer deal for energy consumers lies instead in a more transparent and well-functioning wholesale market.”