New Thinking Blog: The Solution to Rising Bills is Demand Reduction and Courage in Leadership

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on Oct 25, 13 • posted by

New Thinking Blog: The Solution to Rising Bills is Demand Reduction and Courage in Leadership

Photo of Tom StewardThe Solution to Rising Bills is Demand Reduction and Courage in Leadership

Tom Steward, IGov Team, 25th October 2013

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The nights are drawing in, leaves are changing from green to gold, and energy suppliers are announcing price hikes. Along with animals disappearing into hibernation, energy price rises have become what looks to be a permanent sign of the start of winter. This week, Npower and Scottish Power joined British Gas and SSE by announcing this years’ price rises. With bills reaching record levels, leading more and more households into fuel poverty[1], a number of parties have been keen to offer their solutions to the problem. However, none of them seem to have identified the two most fundamental things missing from our energy system – significant levels of demand reduction, and strong, courageous leadership.

The most radical, and by far the most widely-publicised solution to rising energy bills comes from Ed Milliband, in the form of a 20 month price freeze, during which time he could impose major changes upon the industry. These include the separation of the generation and supply arms of the Big Six, the reintroduction of a pool-based market, the scrapping of OFGEM, and the formation of an Energy Security Board. Amongst these solutions, the price freeze in particular has been shown to be very popular among the electorate, although potentially less so with some market commentators, including Professor Dieter Helm who warns it is hard to think of any measure better designed to undermine incentives to invest. He is however more complimentary of Labours other proposals.

The coalition was clearly put somewhat off balance by Milliband’s proposals, and in between the name-calling, were only able to offer two, rather weak suggestions. The first was to advise people to switch energy supplier to find a cheaper tariff. Given that the latest figures from Ipsos Mori suggest that 60% of people have never switched energy supplier, I suspect that few will be motivated by the suggestion now.

The second response came initially from George Osborne, but was reiterated by David Cameron on Wednesday, saying he would ‘roll-back’ the so-called ‘green levies’ in customer bills. These charges make up approximately 8% of the average dual-fuel bill, the largest share of which pays for the Energy Company Obligation (ECO) – a policy which helps to reduce energy demand for poor and vulnerable households, as well as those in hard-to-treat homes. Although far from a perfect policy, ECO has made some progress; having lead to the installation of nearly 245,000 demand-reduction measures across approximately 215,000 homes in its first eight months of operation. (This is stark contrast to the coalition’s flagship policy, the Green Deal, which has thus far led to improvements being installing in only 57 homes).

What Osborne and Cameron seem to be missing is that the demand-reduction supported by these ‘Green Levies’ is one of the best ways to create lasting protection for consumers, particularly the fuel-poor, against rising energy bills. Put simply, the smaller the amount of energy required to stay warm, the smaller the impact of any price rises. Any response designed to tackle rising bills, that leads to the removal of one of the only policies working to protect the fuel poor against those very rises, is completely counter-productive. With polls from Carbon Brief, and ICM (commissioned, but not published by the Sunday Times) showing that only 7% – 11% (respectively) of the public believe bills are rising primarily due to ‘green levies’, this appears to be little more than a short-sighted bid to appease the Tory right, at the cost of the fuel poor.

A small flicker of hope was offered by Nick Clegg on Thursday however, saying he would not turn his back on the fuel poor or the environment, and suggesting that levying Green Charges from taxation may offer an alternative solution.

Alongside the political responses, British Gas offered a particularly ill-considered piece of advice. Following announcing its own price rises, it suggested that price increases did not necessarily have to mean bill increases, and that all customers had to do was reduce their demand. Although this is technically correct, it may be somewhat missing the point; that those households that are already existing on the bare minimum of heat and light may struggle to make the demand cuts necessary to match British Gas’ considerable price increases [2].

PR gaffs aside, I think there may be some wisdom to be found among the range of suggestions being tabled. First and foremost, it is widely accepted that there is lack of transparency around true costs and profits in the energy market. Although the last three years have seen ongoing and detailed workings of the Electricity Market Reform, which has involved the development of many policy mechanisms designed to alter operations around and about the electricity market, the actual mechanics of the market itself remain the same. Perhaps a more fundamental revaluation of how the market operates would be beneficial.

The removal of ‘green payments’ from bills, and into the realm of general taxation is also a potentially progressive step. However James Murray, editor of Business Green, warns that this may not be as straightforward as it appear; as well as disrupting current projects in the short term, future projects would be exposed to greater levels of political risk as efficiency schemes compete for monies from the public purse.

And finally, at least on a technical level British Gas are absolutely correct, the simplest way to beat price rises is indeed through demand reduction. However, consumers cannot be expected to go this alone. What is required are much more ambitious policy around energy efficiency, particularly in the domestic sector. Current legislation requires new homes to be highly efficient (at least by UK standards), and from 2018 all rental properties will require an EPC rating of E or above. However legislation must go further. A legal requirement for all homes to be of a certain standard, such as that proposed by Dr  Brenda Boardman, as supported by a means-tested financial support mechanism, funded through general taxation, could provide enormous protection the whole of the UK public against future energy price rises.

Reducing the effect on the public of future price rises is essential, but so too is cutting off the problem at the source. David Cameron rightly pointed out that it is wholesale gas prices that are responsible for the greatest percentage of bill increases over recent years, but also that the UK government has little control over those markets. However where he used this as the basis for eliminating ‘green levies’ (as something the government can do something about), it seems in fact a more logical argument for the urgent need for transition to a clean energy system that is free from the whims of international gas markets.

It seems however, that underlying all of this is the problem of leadership. To stand firmly behind the need for an energy transition, while forcing disengaged consumers to insulate their homes, and ensuring the funds are there for them to do it, requires real political courage. However, given we are in a world where a suggestion of wearing jumpers in the home quickly leads to considerable back-pedalling [3], the required sort of leadership may be in fearfully short supply.

[1] Masked somewhat by the redefining of the issue in July.

[2] 10.4% price increase for electricity, and 8.4% price increase for gas.

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