Sky high

If that sounds cynical, so too do the energy giants themselves. With the spiralling of domestic bills criticised successively by Labour leader Ed Miliband, the Archbishop of Canterbury and former Conservative Prime Minister Sir John Major, the frontmen for these companies have put on their most regretful faces and deployed some dilution and distraction tactics about loft insulation and measures to relieve geriatric distress, conceding energy bills were a "real worry for hard-pressed households".

Parliament's energy committee has summoned the leaders of the big six to a hearing next week to explain themselves more thoroughly. However, recent history suggests politicians are rarely at their best when channelling public anger. These show-trials, exposing carefully coached men-in-suits to the random fire of grandstanding MP inquisitors, rarely pin down the problems, let alone suggest solutions.

The main question for consumers is where will it end? Will sticking up prices by three times the rate of inflation (or more - Scottish Power raised gas prices by 19% in August 2011) become an annual event?

And is the market broken? Or is it more that it was badly built, when the decision was made in the early 2000s to accommodate growing concerns about climate change?

The UK enjoyed relatively low prices for five to eight years, but the nature of electricity markets is that prices must go up to ensure investment takes place. The Californian crisis of 2000-2001, where large-scale blackouts followed market manipulations and corporate bad behaviour, is the precedent to avoid here, though not even Ed Miliband - whose attack on the power companies is proving a political gift that keeps on giving - is comparing the UK power companies to Enron. He is also calling for the abolition of the regulator Ofgem - although it was Labour that established this "toothless" body - and its replacement with a regulator "that will genuinely be on the customer's side".

Because he rarely intervenes in ­contemporary debates, is not chasing headlines for political advantage, and is a free market-loving Tory, Major's intervention was the most devastating to the reputation of the power companies, and the least easy to discount. He said: "I do not regard it as acceptable that they have increased prices by this tremendous amount. Nor do I regard their explanation as acceptable, that they are investing for the future.

"With interest rates at their present level, it's not beyond the wit of man to do what companies have done since the dawn of time and borrow for their investment rather than funding a large proportion of their investment out of the revenue of families whose wages have not been going up at a time when other costs have been rising,"

For some energy analysts, however, the political solutions to the consumer's plight - Miliband's 20-month price freeze, and Major's windfall tax on profits in the case of a cold winter - are not the tidy answers that their supporters have suggested.

For them, solutions to the perceived problem of excessive energy costs are best derived from a more sophisticated understanding of the pressures on producers, and how they developed.

Professor Gordon Hughes of Edinburgh University, a former senior adviser on energy and environmental policy at the World Bank, is highly critical of what he sees as a form of professional ignorance and hypocrisy from politicians that only makes matters worse. He also disputes the central premise that power companies are ripping off the consumer, noting that margins on retail sales are very low, and there is limited scope to absorb cost increases or to impose increases in prices that are not driven by costs.

"Sir John Major may be an admirable cricket commentator, but his knowledge of the economics of energy markets seems to be minimal", Hughes told the Sunday Herald,

"There is a serious structural problem with all electricity markets. For 80-90% of the time prices are determined by the marginal cost of operating what are known as mid-merit plants. In the UK these are gas combined cycle units, and the wholesale price is determined by the price of the gas required to run the plants.

"[For companies] to recover their ­investment and make a return, wholesale prices must be higher than the marginal operating cost. If electricity ­generators believe that governments will panic and impose windfall taxes, price freezes or similar, whenever prices rise significantly, then they will raise the hurdle rate of return that they apply when making investment decisions, and cut back on the amount of investment.

"It doesn't matter whether investment is funded by debt [as Major suggested] or equity [raked in from consumer bills]. The outcome is the same."

Hughes argues that politicians should look in the mirror when sounding off about the scourge of high energy prices.

"Defending energy companies is not exactly a way to popularity today, but they are simply responding to the incentives built into the energy market created by Department of Energy and Climate Change over the last decade. In my view, any blame falls entirely on successive governments for failing to think through and explain the consequences of clear policy choices. We are paying today for the relatively low prices that we have enjoyed in the past.

"The public does not like that, but ­stability comes at the cost of prices that are on average significantly higher than those in the past."

Whether or not it is acknowledged that politicians have bungled, there is still the question of how to produce a stable regime that does not risk the worst of both worlds: consumers feeling anxious about turning their heating on, and the power companies allowing infrastructure to go unrenewed.

Miliband's solution of a 20-month price freeze worked brilliantly politically, grabbing the political agenda and exposing the government's absence of quick fixes beyond "more competition". Last week's promise to "stress test" green measures that contribute to rising fuel bills was in political terms too little too late.

But few believe it to be a substantive intervention. As Dieter Helm, ­professor of energy policy at Oxford University, puts it: "With an urgent need to build new power stations, it is hard to think of anything that could create a greater ­deterrence to investment than undermining confidence in the ability to get the invested monies back. At a stroke, uncertainty will have gone up not only regarding the 20 months, but also about what happens thereafter.

"This must raise the cost of capital, and in turn mean that electricity bills will be higher than they need be - or taxpayers will have to pay more."

Prof Helm is scathing about Miliband's "popularist" price-freeze proposal, and his "vague" promise to break up the big six, which might or might not mean preventing companies from generating and selling electricity.

"The rationale for the [freeze] is the assertion that the big six have been exploiting customers, pricing in excess of costs and therefore extracting monopoly rents from customers," he said.

"Various statements have been made about profits and dividends, but the surprising thing is that no detailed evidence has been provided that profits have in fact been excessive. It might reasonably be claimed that the market is not transparent, and the nature of the vertical relationships in the industry means that it is hard to tell how appropriate the profits have been. But Labour has gone well beyond this point - it claims that the returns are excessive."

Helms also makes the point that the kind of collusion and abuses that the Labour party is alleging are either illegal or matters for review by the Competition Commission (CC).

"Labour accuses the companies of abuse of dominance, possibly of discrimination, and must as a result be asserting some form of collusion.

"A CC inquiry would provide the basis for an impartial analysis of these various claims and this analysis could be made available as interim and final conclusions in time for the next General Election, and hence provide the basis for Labour's actions should it win in 2015. The policy would not then be so popularist, but it would have a core rationale."

The procession of big six energy ­companies announcing price increases has been grim for consumers, and a ­political headache for a Coalition ­Government keen that improving economic data leads to a corresponding feelgood factor in time for the 2015 election.

Emphasising the iniquity of the energy market could help make this the kind of "voteless recovery" that confounded previous governments, including John Major's in the mid-90s.

While it rarely hurts to emphasise consumer concerns against corporate power, so far none of those fuming at the evils of the big six has produced a convincing case that political diktats would work any better than market forces at keeping consumer energy costs in check in this hugely complex market.