Energy bills: right issue, wrong approach

David Cameron is right to focus on energy bills, but his proposals will do little to help improve outcomes, writes Will Straw.

 

David Cameron is right to focus on energy bills, which have become one the most important issues facing voters. But the timing of his announcement is, at best, puzzling, while the content of what he said – only partially clarified by the energy minister this morning – would do little to help improve outcomes.

We all know energy bills have been rising in recent years – from £605 in 2004 to £1,060 in 2010. But research (pdf) published earlier this year by IPPR shows some households are paying £330 more per year than their neighbours for the same amount of energy. As many as 5 million people could be being overcharged with the poor and elderly most at risk.

The best route to bringing down costs is to improve competition in the energy market. But at present 99 per cent of consumers are with one of the Big 6 energy firms. There has been a concerted campaign by groups such as 38 degrees, Which?, and politicians on all sides to encourage consumers to switch supplier. This is to be encouraged, but at present is only being taken up by 5 per cent of consumers.

The government is right to identify Britain’s complicated tariff arrangements as one of the problems. Some energy firms are overcharging their inert customers through tariffs that are not properly cost reflective. This is where the huge differentials come from and it allows them to offer ‘loss leading’ tariffs to the small pool of consumers – often young and tech savvy – who have the energy to shop around.

But compelling all firms to give the lowest tariffs to their customers, as Cameron said yesterday, is simply the wrong approach. People should have the right to a discount for paying by direct debit or online while others may choose to pay a modest premium to source low carbon energy.

Instead of announcing a populist measure that will be hard to enforce and likely to prove counter-productive, the government needs to put enhanced competition and the protection of vulnerable consumers at the heart of its approach to the energy market.

This could include Ofgem limiting the number of tariffs so consumers are less bamboozled. Ofgem should certainly expand licensing requirements so all tariffs – including fixed-term tariffs and those with introductory discounts – reflect the true cost of energy. They should increase the transparency of its published estimates of suppliers’ costs since this would allow new entrants to identify efficiencies and challenge the power of the incumbents. Improving the liquidity of the wholesale market would be another route to encourage competition in energy supply, which should help bring down costs.

Ofgem are expected to publish their Retail Market Review tomorrow with answers to some of these questions. It would have been prudent for the government to have waited for the conclusion of that process, with which the industry had spent years engaging, rather than shooting from the hip.

The chaotic nature of Britain’s energy policy is already spooking investors with a number of businesses writing to Ed Davey last week to set out their concerns with the direction of travel on low carbon generation. The government will have to tread very carefully now to ensure that its retail policy does not end up backfiring as well.

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