Into the Cold

While the coalition bun fight continues, we’re losing sight of what’s important

14 October 2013

Ian Preston, CSE's Senior Analyst, takes a look behind the headlines of the latest energy price rise furore.

Energy giant, SSE, recently announced plans to raise the cost of its domestic gas and electricity by 8.2%. This came about a year after the last round of energy price rises in which, between August and December 2012, the ‘big six’ energy companies outlined price hikes of between 6% and 10.8%. At that time, the companies blamed rising wholesale prices, the cost of transporting energy to homes and the increasing cost of government social schemes.

The figure below is taken from an online BBC article and it clearly shows how the big six adjust their prices uniformly:

Ed Milliband’s pledge to freeze energy prices at this year’s party conference season sparked a whole series of responses.

From the Government benches Ed Davey has called for energy companies to be more transparent over the costs of the Energy Company Obligation (ECO), whilst the Chancellor of the Exchequer has shamelessly called for the ECO to be scrapped (though in this he is seemingly at odds with the Prime Minister who has spoken out in support of 'green levies').

Here at CSE, our CEO Simon Roberts has commented that the furore simply shows how broken the relationship between energy companies and consumers is. And trustee, Brenda Boardman, has asked 'Does parliament not care?' and reiterated that if we’re serious about tackling high heating costs, then we need to get serious about insulating our homes.

So why exactly are prices going up?

CSE has taken a hard look at the factors that drive up energy costs and the impact of policies on domestic consumers, capturing both the benefits (e.g. energy efficiency and renewable energy measures in homes) and the policy costs passed to consumers via bills. Bringing these two aspects together is essential for seeing the whole picture.

Too often, when policy impacts are discussed, the costs are considered but not the benefits. For example, RWE npower’s report analysing future policy costs does not take full account of the benefits of these policies which will bring down bills for householders who receive them.

Our most recent work for Consumer Futures suggests that the average household energy bill in 2020 will be £30 lower than today as a result of existing energy and climate change policies. This average, however, masks a wide spectrum of ‘winners and losers’, with some households bearing a disproportionate share of the policy costs, in particular low income households that use electricity to heat their homes. If these households, for example, fail to receive the benefits of policies (energy efficiency measures and/or financial support) then they could see an increase in their average annual energy bill in excess of £200 by 2020.

This isn’t a call to scrap these policies - it demonstrates the need to target them better.

The following table shows the average change in energy bill by 2020 as a result of government policies, by household heating fuel. This highlights the issue with electrically heated households. The large scale infrastructure policies that do not come with any direct benefits for domestic consumers (i.e. EU ETS, Renewables Obligation, Carbon Price Floor and Contracts for Difference) are all levied on the electricity bill, even though their benefit (less use of fossil fuels) is for all of society and also future generations of bill payers.

 

 Average change in bills
across all households

LosersWinners
 Electricity +£48 +£282 -£258
 Gas -£32+£59 -£166
 LPG -£58 +£6 -£220
 Solid fuel  -£61 -£1 -£139
 Biomass  -£150 -£14 -£371
 Oil -£156 -£1 -£394

The underlying drivers for price changes between now and 2020 are wholesale changes in energy costs and investment in network infrastructure. On the latter, the UK's networks require investment as a matter of course, not, as many in the press appear to assume, because of the Government's low carbon policies.

CSE has also performed detailed analysis of the implications for domestic energy bills of six scenarios for fuel costs and policy success, not only looking at the benefits but also at a range of inputs (again rarely done and beyond DECC’s one scenario approach in its Annual Statement). This report concludes that:

“Across all of our scenarios and across fuel types, the factor most likely to determine the average fuel bills in 2020 will be the costs of wholesale energy (fossil fuel prices) and the networks. It is not true to say that policy costs are driving the cost of energy bills.”

These findings are echoed by Derek Lickorish, Chair of the Fuel Poverty Advisory Group, who notably spent a large proportion of his career working for EDF Energy (and one of the companies it acquired from SWEB).

"The rise in energy prices is due to a whole variety of things, by far the most important of which is what's happening in world energy markets," he told BBC Radio 4's Today programme.

"We've had over a period of years very rapidly rising demand in Asia, particularly in China. We've had restrictions on supply from countries like Iran. A combination of these things has pushed up oil and gas prices and that is what has fed through to consumers."

There is a further issue which the majority of recent news stories seem to have completely overlooked. The suppliers themselves are 'vertically integrated businesses' which mean that alongside their retail business (where they sell energy to us), they have significant generation capacity (which they sell to the market) and in some cases they also manage the networks for the distribution of electricity and gas. As a result, they themselves are beneficiaries of policies such as the Renewables Obligation. Furthermore, they also often have in-house teams that deliver insulation and heating schemes, meaning they will also benefit from any profit margins from the delivery of ECO targets themselves.

In my view, without total transparency on the costs of energy on all our bills we will be stuck with another polarised debate based on people’s opinions about climate change. Lord Stern, the former head of the government economic service, has gone further, stating that “climate-sceptic newspapers are conspiring with energy firms in a campaign of misinformation on bills.”

To me, what really matters are the benefits that the ECO offers householders, the actual reasons for increased prices, and understanding if these are justified.

But ... Policy costs are only justifiable if they are spent wisely and targeted well. If not, then they will prove neither effective nor fair in delivering the benefits for which they were designed.

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