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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9 Responses to “Energy bills: right issue, wrong approach”

  1. LB

    Lets have clear taxation printed on each and every bill.

    e.g VAT. Fuel Duty. North sea taxes. All of them should be printed on the output.

    Amount going on corporation tax.

    Tax paid by the employees of the company (because that’s on the bill)

    And lastly the amount of the bill paid out to the shareholders as profit.

    Green subsidies should also appear.

    That way it is clear, who is taking the most out of people for their bills.

  2. Newsbot9

    So additional ink wasted, neat-o!

    Make it plain how YOUR taxes are hitting, rather than doing anything about them.

  3. Newsbot9

    Our rental agreement states we can’t change supplier. Even if that’s non-enforceable, if we did and the Landlord found out he could get rid of us with no reasons given in 2 months, as we pay month-to-month.

    Moreover, what about people with the massively expensive meters? It’s a ripoff which hits many of the poor hardest. The energy companies need to be brought to task on that – people with meters should be able to access any normal tariff, with a small surcharge for the ACTUAL ongoing costs of the meter (the energy company should have to eat the capital costs, after all it ensures they’re paid up-front!)

  4. LB

    I agree. I think we can go a bit farther.

    You should be allowed to change tariff retrospectively.

    So if at the end of the year, Tariff A would have been cheaper than Tariff B, the tariff you were on, then you should pay the cheaper rate.

    No need then for lots of switching or comparisons, or guess about your usage. The energy companies just have to implement a little algorithm, and OffGas etc just have to audit that.

  5. Newsbot9

    To some degree, the question then becomes why have different tarrifs? They’d only then keep special tarrifs with limited availability (i.e. for pensioners)

    Hm, what IS the issue with that? I’m not seeing major problems, and it’d certainly cut down on tarrif clutter.

  6. LB

    It’s only by transparency that people will discover how taxes are screwing them over.

    For example, if that median worker had invested their NI in the FTSe, they would have a fund of 550,000. They get a pension that costs 130,000 in return.

    Now if it was clear that welfare has cost someone on 26K a year over 400,000 pounds, what do you think their reaction would be?

    [The money has leaked elsewhere, and with no compound interest, they’ve lost]

    I’m surprised you’re interested in transparency for taxes by the way. What about complete transparency for everything?

    ie. All government spending, how much and to whom, down to the penny.

  7. LB

    I can see the following as being valid.

    1. Discounts for buying lots of gas.
    2. Fixed rate deals for a given period
    3. Spreads over a fix in the price of wholesale gas.

    All of those are valid pricing structures.

  8. Newsbot9

    Ah yes, unless you’re a ruch guy you’ll pay MORE for gas.

    Never mind.

  9. Newsbot9

    “Screwing them over”

    Only under your plan of now paying what the paid for, because of your plan to keep shrinking wages and the government budget indefinately (austerity).

    Again, YOUR plan is to rip people off, and to lie to them about returns. The average worker would have less than 10% of that. because of your buddies fees. Moreover, not everyone can invest in the FTSE and if they tried…

    Of course you want to frighten competent people away from dealing with the government because you want to publish their home addresses so your lynch mobs can seek them out.

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