Can we cut energy bills? Part 2.

In the first blog in this series we looked briefly at the background issues on cutting energy bills when at the same time we are trying to de-carbonise. Commentators and politicians have made a number of suggestions over the last month or so. Lets have a look at these ideas currently doing the rounds.

Switch from the big six

The PM and Secretary of state for energy are particularly keen on this one. In fact they want to make it far quicker to switch. I’m not with one of the big six, but one of the minnows. At the moment according to the switching site I’ve just had a look at I could save about £450 (if I was an average user) by switching. This looks at first glance as though this is a winner. However, 60% of people do not switch suppliers, most regarding it as too difficult.

My verdict: Often the deal when switching is not as good as it first seems, special deals to get you signed up then vanish after a year or so. It also assumes users have a back account and are internet savvy.  This puts the elderly and those on low incomes at a disadvantage. The Department for energy and climate change are training volunteers to help people switch to tackle this latter problem. In addition my supplier has raised their prices ahead of others, so in a month or so the price advantage may not be as great as it seems by switching. If you went to a price freeze deal suppliers used to be able to kick you off it if prices rose. They cannot do that any more, although some have yet to realise this judging by the results I found on the switching site.

Politics: All keen on it in government with more changes on the way including the fact you must always be put onto the lowest tariff. Motherhood and apple pie, but not the magic bullet in the long term on energy bills.

Increase competition

Another announcement this week has been that examination of how well competition has been working between the big six will be made soon (and then every year hereafter).

My verdict: This is been done so many times that I’ve lost count.

Politics: Labour think this is sham. I agree.

Cut green energy out

Many Tories are climate sceptics who hate wind turbines. What could be better than to get rid of green levies? Especially as this is the only part of energy bills (apart from VAT) that the government controls. However, a glance at the graphic shown in the first part of this blog post suggests that the overall saving, even if you could remove it all would be at most 9% off your bill. The renewables support could not be cut for the following reasons. First, its “grandfathered”, guaranteed for 20-25 years ahead. Those of us who benefit would take legal action. Second, the government would fail to meet its own legally binding climate bill. Third, we would not meet the 2020 EU target either, with very large fines the result. In fact Cameron has promised that these are safe going forward. The most likely thing is that the Energy company obligation (ECO), which is used to insulate homes of those who are struggling with their bills will be switched to general taxation. Apparently whilst the energy companies blame these for part of the bill rise they have radically different figures for the % increases in these measures going forward. The ECO spend has not changed in recent years.

My verdict: We can argue about whether the green levies are regressive. They probably are mildly regressive, but at the same time we have all created the climate mess and all need to pay to to stop it getting worse. I am also very cynical when middle class people state that some tax or measure (almost always a green one) should be cut because it affects the poor.  To cut green levies would be crazy. The ECO improves the nations energy efficiency infrastructure and we would end paying more for those in need penalised through other parts of the social security system. Switching to renewables whose costs are fixed at installation rather than relying on ever more costly gas or nuclear would be stupid. Also this is a one off cut that would soon by undone by higher wholesale cost increases. There is a danger that if this spend is moved to taxation it will be cut in the future.

Politics: Under political pressure the PM got desperate. The Lib Dems will not let him cut green levies although its possible some of this may switch to being paid for by general taxation such as the ECO. Therefore you might get a 4% cut in energy bills after Christmas.

VAT

Sales tax (VAT) is levied on energy at 5% by the government.

My verdict: It would be illegal to cut this under EU law.

Politics: This would depend on the UK voting to leave the EU. I think this is unlikely and in any case is years off, even if it did happen.

Renationalise big six

This has been raised in an article in the Guardian recently and current polls are said to show about 70% in favour. At this point I should like to add a disclaimer. I would not have privatised the energy industry nor have I ever bought shares in any of the big six. However, this is not quite the magic bullet it quite seems. It would probably be illegal under EU law, especially since four of the big six are owned (ironically) by European majority state owned energy companies. In addition we do own shares indirectly through our pension funds. Therefore we could just seize the companies we would need to buy them. This then becomes a very expensive operation. Its not that easy to find out their market capitalisation, but British Gas was worth about £15 billion in 2011 and SSE last time I looked about £6 billion. This starts to look very expensive for the taxpayer.

You then have to ask how much we would save on our bills. One of the justified criticisms of the big six and the current energy market is the big six both generate and retail energy. This allows them to make money twice. So in the graphic in the first post the profit given is 6% which is not totally unreasonable considering what we are asking them to do. However, this is probably not the whole story, 47% of the bill, or nearly £600 is made up of wholesale prices. Some say this includes the profit they make generating electricity or providing gas. Its almost impossible to work out how much of this profit they make out the wholesale part but the highest figure I’ve heard quoted is 20%, or £120 of the £600 total. Added to the 6% figure (£79), if this latter figure is merely a profit on the retail side, gives nearly £200 off a bill. Except its not as high as that since the state owned company would still need to make profits to invest in new generation.

My verdict: I’m not totally opposed if some way could be found to do this on the cheap. I do have concerns over the government then effectively funding the building of the new nuclear power stations which are bound to run heavily over budget and also over the status of micro-generation. This would not be the magic bullet over energy bills due to increasing gas prices anyway. I will leave the reader to work out if they would be better off with the government borrowing the money to fund renationalisation through higher taxes so we could bills by something less than £200.

Politics: Non starter. No party supports this. It does strike me as ironic though that the party that privatised gas and electricity finds itself in such a scrape over this and has no idea what to do.

Price freeze and break up

I’ve blogged on my concerns over the price freeze. The Labour party don’t mention this so often, but they also intend to break the big six up. The CEO of one of the small suppliers I heard on the radio reckoned that if the wholesale market was truly open this would reduce prices at the moment by about £50 (this puts the £120 figure I came up with in perspective above).  Which figure is correct – I haven’t a clue.

My verdict: I think this is a good idea. To me it seems wrong that companies can make money twice in the way they do with so little transparency over how they make it. However, your energy bills may not show that much difference. My only concern is that the generators are left big enough to have the financial clout to invest in new kit.

Politics: If labour win in 2015 this will happen.

Fracking

Surprisingly fracking hasn’t come up much in this debate. I oppose fracking but even if it would reduce energy bills, it won’t for about 10 years.

My verdict: I’m cynical enough to expect fracked gas to be sold for the current market price. This won’t lower energy bills. In fact the government have as good as said so in suggesting the wholesale price of electricity is going to double in the next 10 years with their strike price for Hinkley C.

Politics: Looks good until its in your constituency!

All of the ideas above are due to people casting around for a short term solution to a long term problem. Energy bills are just going to keep going up and we need to stop avoiding that issue and see if there is any way round it. In the next blog in this series I will look at some ideas to cut energy bills that no one is talking about.

Neil

This entry was posted in gas, other, Renewables. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>