When it comes to cutting energy bills there are no easy answers

Oct 9, 2013

Ed Miliband’s promise to freeze energy prices poses a tricky question for the other parties. Is there anything politicians can do that will make bills lower over the next few years?

The first point is that the ability of Government to do anything about the cost of electricity and gas bills is limited. Of course, they can set prices, as Miliband seems to want to, but that risks putting off investors and therefore creating higher prices in the long-run.

But government initiatives do add costs. Subsidies for renewable energy, support for energy efficiency programmes, carbon taxes, VAT and cheaper tariffs for poor households add around £110 to an average bill of £1,400 at the moment. This will rise to around £300 by 2020 (although government argues other policies will bring overall bills down). This is really the only area where cuts can be made (bills may fall if the cost of gas and coal comes down, but the government cannot really control that). Of course, the Tories could simply abandon all their green commitments. That would be a terrible and reckless idea, in my opinion, but that is an argument for another day.

So if you accept the restrictions that you have to meet your carbon targets, how could you still do that and reduce bills? Below are the options. None are straightforward and most would face severe political opposition and may mean breaking European commitments. And they are all complicated and interact with each other so it is hard to pinpoint exactly what the savings would be.

  1. Scrap feed-in-tariffs for solar panels on roofs. This would save around £20 on the average bill by 2020 (although probably less as many commitments already made). This is a deeply regressive policy, with poor people subsidising eco-bling on rich people’s roofs. It is also a very expensive way of decarbonising. Expect huge resistance from green groups.
  2. Reduce renewable ambition. Much of the expected rise over the next seven years is driven by the Renewable Energy Target, which says the UK must get 15% of its energy from renewables by 2020. This has pushed us towards the too-fast deployment of some very expensive technologies, such as offshore wind, while not doing much for carbon. This kind of renewable support will add about £110 to people’s bills in 2020 (although we will also benefit from lower wholesale prices). Reducing the level of support is one option, but it would mean unpicking the most bruising of negotiations between DECC and Treasury. It would also face strong resistance from those companies who are set to benefit. Another potential victim is the new nuclear power station in Somerset, although how much that might save is far from clear.
  3. Scrap the carbon floor price. This is expected to add £50 to bills by 2020. But if you get rid of it, you need to find the Treasury the substantial money is raises from elsewhere. And if the European trading system is improved, as it should be, you will face the same costs anyway. Business would love this move.
  4. Make energy efficiency options cheaper. The government has chosen to support some pretty expensive options to insulate our homes, which will add around £50 to bills in the next couple of years. Looking at cheaper options to deliver this would be one option. They could make Green Deal loans interest free, potentially transforming that market (though Treasury is opposed). They could reduce stamp duty based on the efficiency of the house (if you buy a draughty castle you pay more than a castle with the cavity walls filled in).
  5. They could take the cost, or some of the cost of these policies off bills and into general taxation. This would be less regressive, but these are huge sums and you would have to find further spending cuts or tax rises to pay for them. You could also spend more of taxpayers’ money on insulation measures to the poorest homes, as the Energy Bill Revolution advocates. Again, the money has to come from somewhere.
  6. They could redirect the Winter Fuel Payment away from rich pensioners to more vulnerable people, who are really in fuel poverty. This would break some pre-election Tory promises.
  7. If you think the market is dysfunctional, there are other measures: you could launch a competition investigation; you could reform the wholesale market (as Labour proposes or as Ofgem is doing); you could break up the Big 6; you could windfall tax them; or you could make switching much easier, which is a very good idea. It is not clear what effect on bills any of these measures would have (which is a question Labour has to answer).
  8. In the medium term, you can encourage shale gas, both in terms of imports and exploring in the UK. This is extremely sensible, both from an economic and a climate perspective, as there is huge potential. But there is also considerable uncertainty about the potential and what effect it would have on prices.

So no easy options at all, and the Tories faces the age-old political problem of how do you counter populist policies, even if they are reckless? The benefits of independent regulation and enhanced competition are not a sexy sell in comparison to freezing prices. The honest message should be that prices will rise, we will do everything we can to keep them as low as possible and that we will protect those who are most vulnerable while we do. Sensible policies should flow from that. But whether it makes good politics is hard to say.

This article originally appeared on BusinessGreen

Author

Guy Newey

Guy Newey
Head of Environment & Energy, 2010-2014 Read Full Bio

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