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Thursday, July 31, 2008

Tackling fuel poverty

Those British Gas customers faced with a 35% rise in their gas bills and a 9% hike in the price of electricity will not be able to find much to comfort them at all in today's press coverage. Even Centrica's attempt to justify the increases whilst simultaneously trying to make us feel sorry for them has deservedly fallen on stoney ground. After all nobody has much sympathy for a company suffering a 19% fall in first-half profits when they are still trousering a surplus of £992m.

In today's Independent Vince Cable argues that a windfall tax on the energy companies is not the way forward. He says that headline profits usually relate to global operations, of which only a modest part is in the UK. He points out that North Sea producers already face a windfall tax. I am not entirely convinced. I believe that there is a role for stronger regulation to rein in price rises for those companies who are recording large surpluses. Nevertheless I entirely agree with the remainder of Vince's analysis and the three action points he identifies for government:

There is, however, a separate argument about the electricity and gas companies. These companies benefit from a windfall received from phase two of the Emissions Trading Scheme. During phase two of the scheme, the vast majority of permits to produce carbon dioxide have been given away free, and energy companies can decide to trade rather than use these permits.

The energy regulator Ofgem has calculated that the collective windfall of energy producers from the introduction of free ETS permits amounts to £9bn over the whole of phase two (five years). At least some of this money is fair game: there is a difference between profits made because of increasing demand and profits made because of a government giveaway.

Indeed, the Government (and the industry) has now accepted this argument in principle, and will auction permits in the future in a way that their scarcity value accrues to government rather than to the industry.

The industry argues that the current arrangements were entered into in good faith and that they should not be taxed retrospectively. But it is not unreasonable to expect it to shoulder more responsibility.

Indeed, there are other arguments for taking a tough approach. The competitive market which once existed in electricity generation has largely disappeared, with six major vertically-integrated companies dominating it. Moreover, the claim that consumers can shop around for good bargains is undermined by analysis from the University of East Anglia, which shows that a third of switchers actually make themselves worse off, and half of customers never switch. Overall, there is a strong case for a Competition Commission referral.

Vince argues that we should be looking to is to improve energy efficiency: According to the Local Government Association, at least 12 million houses are currently inadequately insulated, costing households around £200 in lost energy. Some companies, under the Carbon Emission Reductions Target, already have a rolling programme to insulate people's homes, but this needs to be scaled up hugely. A 10-year rolling programme of £500m could ensure that not only are all British homes adequately insulated, but that household carbon emissions are reduced by a fifth.

Secondly, we need to do something about pre-payment meters: the most vulnerable customers face disproportionately high bills from pre-payment meters. Ironically, despite the claims to offer a "social tariff", major energy companies charge a negative social tariff. According to recent research commissioned for Energywatch, those on pre-payment meters can pay up to £142 more than people on direct debits on their combined gas and electricity bills. With around a quarter of poorer fuel customers on pre-payment meters, this has to be a priority.

Rolling out social tariffs to ensure that the 2.25 million people on pre-payment meters are not unfairly penalised would cost the energy companies in the region of £275m a year. Given the level of their ETS windfall, this does not seem an unreasonable obligation.

Finally, there should be a systematic investment in smart meters, which display consumption costs and enable customers to plan their energy usage: Energywatch has shown energy usage can be reduced by between 3 and 15 per cent through changes in behaviour. With a 5 per cent reduction translating into a bill reduction of around £35, this can also help reduce fuel poverty. What is more, the introduction of smart meters that can be read remotely could also significantly benefit the energy companies.

It is a forceful argument and one that both the energy companies and the government need to take notice of. If Gordon Brown is looking for an issue by which he can force his way back into electoral reckoning then this is it. He needs to be decisive and uncompromising. Customers have been at the mercy of market forces on gas and electricity prices for too long. We need a government that does not just understand the economic pain but does something about it.
Hi Peter! Keep on blogging:

Here's what I said in a comment on Vince's article:

'Pussyfooting around, Vince! Why not a simple law which says these big monopolies *must* each sell every single unit to every customer at the *same* price? (no more price bamboozling, special intro. offers etc.)(including all big commercial customers)
Now is that a difficult concept to sell? All units to all customers at the same price. Then let competiton (or the lack of it) work.'

Excuse the tone; only done for impact. But seriously: Why not a single-price law? The idea in economics is as old as Rockerfeller anti-trust legislation. For markets to work, customers need information. Monopolists will rent-seek etc etc. All simple basic economic ideas. Go on! Give it a go!

Another idea which you might filch from Belgium, is the Flanders water-charging scheme: Where each resident gets a basic allowance of about half typical individual consumption -- for free. The WatreCo reclaims the difference by charging a bit more for the rest. Details in attached file. It's sensible enivironmental economic too -- use the market to encourage conservation, without regressive effects on the poor.

Basic citizen fuel allowances, a civic right? Charge the gas-guzzlers more? Good politics?

see http://www.conallboyle.com/housing/HsgMnyLandIndex.html

for more about the Flanders water-charging scheme
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