Why energy price policy is hard

That is the topic of my latest Bloomberg column.  The core problem is that if you let prices go up “too much” (i.e., to where they ought to be), many people will stop paying their bills.  We don’t in fact have the political economy in place to enforce the wealth transfer to the public utility:

You might think, as I do, that utilities should take a relatively tough stance on delinquents. Still, the realities of politics can intervene. By one estimate, Truss’s plan would lead to average energy bills of £2,500, compared to £3,548 with no plan.

That is quite a difference, and many people might have trouble paying the higher amount. They might be able to pay more, but at what cost? Fewer pub visits? No satellite TV? Would people in fact choose such austerity? Customers know that if enough of them do not pay their bills, it would be very difficult to cut off service to such a large part of the electorate, especially with winter approaching.

By way of comparison, consider the current water crisis in Jackson, Mississippi. The town’s water utility is undercapitalized, and almost one-third of customers are behind on their bills . About one-sixth of customers are not even receiving bills. Yet it would be politically unfeasible for Jackson’s elected officials to cut off all those users, regardless of whether it would ultimately be more humane.

The fact is, it’s not always possible to increase prices. Especially if you are unable to collect any payment at all from many customers.

The problem is worse yet. Once customers are in the habit of not paying their utility bills, it gets harder to collect payment, even if future prices are much lower. Customers might expect the no-payment-necessary regime to continue, and to organize with that goal in mind. This is a common problem in lesser developed nations.

I do not favor the extensive UK energy subsidies, which unduly distort relative price signals, but they have to be understood in this context.  Their net cost, relative to the alternatives actually on the table, is not nearly as large as it looks.

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