UvA EB professors Maarten Pieter Schinkel and Jan Tuinstra, together with their PhD student Simon van Tartwijk and 2 other competition experts, published an early analysis of some of the effects of the price ceiling policy on market competition and energy prices. Some of their suggestions for improvements of the policy are currently informing the debate.

Warning

Their prediction is that market prices will rise as a result of the Dutch approach to apply the low ceiling prices to generously high consumption volumes that are the same for all households. As a result, the costs of the policy for the Dutch government are likely to rise too. In an article in the journal Economisch-Statistische Berichten (ESB), the authors warned against compensating the energy companies on the basis of retail prices, which appeared to have been Minister Jetten’s intention and currently is what the energy providers are bargaining for. The article offers a number of easy to implement recommendations to prevent these upward pricing pressure effects. Still the Dutch policy as proposed has unnecessary restrictive effects on competition. 

Schinkel (professor of Competition Economics and Regulation) explains the reason for publishing the article in an ESB fast-track publication: “Our recommendations were really warnings to be considered in the design of the policy, still ongoing within Dutch policy circles. In particular we believe it is better to compensate energy companies for the additional costs they incur above the price caps, and not for their lost turnover. The latter appeared to be the plan in Minister Jetten’s letter to Parliament and several interviews that he gave. Doing so will at least remove that particular incentive for the energy providers to raise their energy prices further. We are glad that the Dutch government, instructed by the Parliament, is negotiating now for a cost based compensation instead. But is remains uncertain as we speak. In the end, a method with upward pricing pressure may just as well be the outcome.’

Maintaining competition

Another recommendation is to lower the volumes of energy consumption to which the price caps apply – and reduce the ceiling price at the same time, to levels that imply that households de facto receive the same value of support for their energy bills. ‘You could even decide to deliver a certain volume of gas and electricity free of charge. Lowering the ceiling volumes maintains competition much better. That is because it implies that many more  - or even all – households will then stay in the market for their consumption above the ceiling volumes. As a result, the energy companies continue to compete for all households. Market prices and subsidy costs then do not rise further than they already have due to supply problems. This approach still helps households to deal with high energy bills just the same – which was the reason why this policy was introduced in the first place’, says Schinkel. The Dutch government, however, appears to stick to the high ceiling volumes that it had previously announced.

‘Experimental policy making’

Together with their other co-authors, professor Marco Haan (University of Groningen) and Dr Bert Tieben (SEO), the UvA EB economists continue to work on international comparisons and theoretically modelling of what they refer to as the ‘experimental’ Dutch price ceiling policy. ‘This type of market intervention raises many new questions for fundamental research,’ Schinkel says.

The full text (in Dutch) of the energy price cap analysis and the recommendations of the authors can be viewed on the ESB website. An accompanying opinion was published in Het Financieel Dagblad.

In the programme Nieuwsuur of 4 November (starting at 4.40), professor Schinkel explains why the Dutch would be wrong to accept a compensation scheme for the energy companies that is based on market prices and lost turnover.