When Britain’s energy regulator, Ofgem, warns of upheaval in the energy sector: it’s going to be bad! Energy companies are collapsing by the day. Consumers are worried about whether they’ll have access to vital supplies as winter approaches. All the while wholesale gas prices continue to soar, increasing four to five-fold; the ramifications are wide ranging and serious. Rising energy prices will feed into higher inflation directly and indirectly through rising costs of manufacturing and food production. At a time when coronavirus government-support is being removed -with the removal of the £20 per week universal credit uplift and the ending of furlough payments -higher inflation will leave many hard-pressed households facing a winter of misery trying to make ends meet.
The role of Ofgem is to regulate a ‘competitive energy market’ ensuring there is sufficient supply while consumer interests are protected. Regulating a competitive market is a contradiction in itself and is the root of the issue. The energy market was deregulated with the privatisation of national utilities like British Gas, PowerGen and National Power in the 1980s and 1990s. The desire was to create a competitive domestic energy sector with many suppliers offering choices and lower prices to consumers.
The 30 years or so of privatisation has been far from successful. The evidence is compelling. The big six suppliers (British Gas, edf, E.ON, RWE, npower, Scottish Power and SSE/OVO Energy) control about 70% of the market. In 2014 they controlled 95%. They were accused of ‘preventing effective competition’ and referred to the Competition and Markets Authority (CMA) after making huge company profits with their consumers seeing little or no reduction in energy bills despite large falls in the price of wholesale energy. About 13% of households in England are in fuel poverty (2018). That’s over 2.4 million households, with the old and most vulnerable having to choose between putting food on the table and heating their homes.
The average fuel-poor household required a reduction of £334 to their fuel costs, to move them out of fuel poverty; the average fuel poverty gap (the Department for Business Energy & Industrial Strategy, April 2020).
Energy companies by law can disconnect those that do not pay their bills, however, in many cases households self-disconnect or self-ration because they are unable to afford to top up their prepayment meter. The majority of customers (about 50% or 13 million UK households) have never switched suppliers, which was the main objective of privatisation, making competition effectively redundant. In reality, there is little or no competition in power generation, transmission and the distribution sectors.
Most new entrants into the energy market have therefore been in retail only, providing energy to the final consumers/households, which is where the current crisis has led to a plethora of insolvencies. Here, many of these new entrants gambled on the wholesale price of gas and energy remaining low, and offered low tariffs to customers in order to gain and increase market share. However, as wholesale prices have soared they have been unable to pass on these increases to customers because of Ofgem’s price caps and thus many of these businesses have become insolvent, unable to fulfil their contracts. The price cap, a means to regulate the competitive energy market, has in effect collapsed these companies, stifling competition and handing market share back to the big six energy companies.
The real beneficiaries of the deregulated energy markets have been a few large oligopoly private corporations and the UK government. These large corporations dominate a captive market, supplying totally uniform goods (gas and electricity), where electricity bills have gone up by a third and gas by a half in real terms since the mid-1990s, according to government figures reported by the BBC. The government sets price caps ensuring adequate profit margins for private companies at each stage of a production – generation, transmission, distribution. The price caps also raise tax receipts including environmental taxes used to shift the energy sector away from fossil fuels and towards renewables. The government and their large corporate friends are therefore pretty much always insulated from the ravages of global energy prices. The big losers of the privatised energy market have in actual fact been consumers, who’ve paid higher bills over and above inflation and the poor, who have faced fuel poverty, fuel rationing and disconnections. This is the paradox of attempting to create competition in a natural monopoly.
The wholesale privatisations of the 1980s and 1990s was based on the dogmatic belief that the private sector was always more efficient and productive while nationalised industries were a burden on the state and taxpayers. This led to the privatisation of even public utilities which are not suited for private ownership because they are natural monopolies. Power generation is a hugely expensive exercise requiring massive outlays of upfront infrastructure capital while duplicating transmission and distribution networks for the sake of competition makes little economic sense. These are such significant barriers to competition that one, large supplier is the best use of scarce economic resources.
Privatising natural monopolies like utilities makes little economic sense therefore but was undertaken for dogmatic capitalist reasons. The government price caps introduced to preserve a semblance of a working market only created perverse incentives, undermined competition and have today undone the market with energy companies collapsing by the day and the government having to step in to safeguard consumers. At the same time, insisting they will not bailout companies when it is the government’s price cap that has effectively made them insolvent.
In Islam, energy is a public property according to the saying of Prophet Muhammad (ﷺ):
“Muslims are partners (associates) in three things: in water, pastures and fire” [Abu Dawud].
Public properties are unique to Islam and are unlike nationalised industries, which can be privatised. Public properties are owned by the Ummah, run and administered by the Islamic state, Khilafah, and can never be sold off to private owners or companies.
Anas (RA) narrated from Ibn ‘Abbas (RA) adding, “and its price is haram (forbidden).”
While the ahadith specifically refers to energy and minerals, the Shariah rule of public ownership extends to any commodity whose private ownership would deprive the Ummah of the benefits of that public property. These include, by definition, natural monopolies. Public properties are a blessing for the Ummah which all should benefit from without fear or favour. The nominal costs of production, generation, transmission and distribution may be charged for but the energy supplies –oil, gas, coal (raw materials) –must be provided for free.
With vast natural resources in Muslim lands, public properties will have a huge benefit in levelling up Islamic society, giving households and businesses near-free access to gas and electricity. The poor would not pay, because heating and lighting are also basic necessities to which the poor and needy have a right. The Islamic state would not attempt to create a false market in energy for material interests and would administer public properties for the interests of the Ummah alone.