Is the PM playing into the energy companies’ hands?

CSE Chief Executive Simon Roberts on the latest rumours ...

6 November 2013

The latest signs from the hyperactive Whitehall rumour mill are that the Prime Minister’s preferred option to control energy bills is to weaken the obligations on the energy companies to save energy.

If he does so, he will doing just what many of the big energy companies would like – to be freed of obligations to install energy saving measures in British homes, the origins of which date back to the mid 1990s.

Cutting or weakening these obligations is economically illiterate. That’s true whatever short-term political gain (if any) is to be had from being able to announce a 50p per week (£25 annual) cut in bills that such a move might deliver.

It is economically illiterate because energy saving is much cheaper than energy supply. So bills go down over time as a result of energy saving by more than they go up as a result of the costs of energy saving.* And using fewer units of electricity and gas remains the best way to insulate people against rises in the price per unit, whatever their cause.

There was a brief period in the 2000s when some of the energy companies appeared to embrace their energy saving obligations and embed these in their core business. They saw them as opportunities to widen their offer to their customers and become ‘energy services companies’ – with their new line in installing insulation compensating for the fall in sales of gas or electricity that the insulation brings about.

But those glimmers of a welcome new approach appear to have been largely extinguished, in part because the companies realised that insulating homes is a very different sort of business, requiring different skills and a different approach to customers. For the last few years, energy companies have generally lobbied for weaker obligations, in spite of the obvious customer benefits.

The Energy Company Obligation (ECO) could undoubtedly do with reforms so that it actually enables the energy companies to deliver energy savings cost-effectively and efficiently.  DECC ignored the many warnings during the design phase, including from the energy companies, and has come up with an administratively burdensome, blunt instrument that causes significant and unnecessary costs which have nothing to do with energy saving.  That can and should be changed immediately.

But to weaken the ECO’s energy saving target would be to help the energy companies at the expense of their customers. Is that really the Prime Minister’s intention?

* Ironically, one of the largely unexplored reasons why energy prices might be going up is because the fixed costs of supply (for the pipes, wires, meters and other supply costs) are having to be recovered over a smaller number of total units being consumed by UK households. This is in part because of the success of these energy saving obligations and other energy saving policies over the last decade. So the fixed cost per unit is higher (but we’re using fewer units).

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