This is a reprint of an article from my Energy blog:
I had a go at Ed Miliband and labours proposed policies on energy a few weeks back. While I understand the populist frustration regarding energy bills I would question whether a freeze on energy prices will have the desired result or will just lead to more of what weve seen over the last few years, i.e. dithering by the utilities a failure to invest in major new infrastructure projects, potentially leading to blackouts due to a shortage of generating capacity in the future.
However it would seem that the Tories have succeeded in coming up with something even worse. Worried about how theyd look in a general election again someone promising to freeze energy prices, theyve been trying to find a way to cut energy bills by getting rid of the green tariffs that are crucial to the reform of the UKs energy sector.
The power companies claim that it is these green tariffs that are why bills are so high. This seems odd given that Green tariffs represent just 8% of an average bill according to Ofgem and they cannot possibly account for price rises in the order of 40-175% in 5 years.
And as Ive discussed before the bulk of recent bill increases are due to rises in wholesale energy costs (and the energy firms being very rapid to pass on increases to customer but being very slow to reduce bills when the wholesale price falls) as well as outright price gouging by the big six energy firms. And as Ive also discussed before, the vast bulk of energy subsidies go towards subsidising fossil fuel consumption, not renewables.
Hence why many energy advisers have condemned these proposals, as they recognise that any reduction in bills it produces are tiny compared to the long term costs it will impose on the economy.
For example one of the measure the Tories have been most keen to attack is a levy that provides funds to improve the insulation and air tightness of the UKs leaky drafty homes. As I mentioned in a prior post heating and cooling buildings in the UK represents 36-42% of the UKs energy consumption (depending on how you do youre sums) when road transport represents 25% and electricity production (some of which is then used to heat and cool homes) represents 20%. Thus, making the UKs buildings, on average, say twice as energy efficient, would produce an equivalent cut in energy consumption as taking all of the UKs coal and at least half of the gas fired stations offline or taking ¾s of the UKs cars off the roads.
In short, reducing the heat loss of buildings is the lowest of low hanging fruit we should be going after. The cost benefits of doing this (remembering that a good deal of the housing that such schemes apply to are social housing or retirees with a winter heating allowance where the state is often the one paying the gas bill) show it is easily worth every penny. This explains opposition to this policy from councils, who don’t want grannies freezing to death in leaking poorly insulated homes.
In short, one can accuse the Tories of a cynical ploy to try and get their allies in the Energy Industries off the hook. However the long term damage that this will do has to be considered. Just a few weeks ago plans for a large offshore wind energy project in the UK were shelved. Now while officially the backers of this project mumbled various excuses about soil conditions on the seabed, my suspicion is it was more the fact that this cancellation was more down to the dithering evident on both sides of Parliament.
Indeed the Tories have been trying to reclassify what constitutes fuel poverty. As its becoming somewhat embarrassing for them, and the utilities, to have so many in the UK calculated as suffering fuel poverty. This is the fudgiest of politic fudges.
And incidentally its worth reflecting on the long term impact of the renewables installation programme in Germany. While it did result in some steep rises in energy costs in the early days of this policy, recently bills have been stabilising or even falling, despite increases in wholesale gas prices as the large level of renewable energy production has served to stabilise energy prices.
Similarly, while Im not a fan of Frances energy policy, notably as regards nuclear, credit has to be given where it is due, they have also succeeded in stabilising their energy costs long term, with this policy, although I would wonder if theyve factored in the full life cycle costs to the tax payer of nuclear waste disposal and decommissioning (as I discuss here).
And this also incidentally, is why I would question this idea of moving such tariffs (as the Tories propose) into general taxation. The danger is that this lumps an ever larger bill onto the back of the tax payer, when it should be the utilities who pay, as after all they are the ones who profit from the UKs energy production so its only fair they pay the costs, not least because it now gives them no financial incentive to change policy nor build any new major infrastructure.
And Camerons cynical dismissal of Green tarrifs as green crap hardly fills one with confidence on how well the Tories will manage such funds if its dependant on funding from government.
Time for a reality check
What we all need to realise is that there is a real reason why youre energy bills are so high. Its because the system of privatisation set up by the Thatcher government was one designed by yuppies for yuppies. It turned the UK energy market into a casino where traders could buy and sell energy. It also led to the consolidation of the UKs energy supply into a handful of large firms. And as Ive pointed out before for capitalism to work, there has to be competition, else it can end up less efficient and more costly than the public sector.
However the Thatcher era energy policy had no mechanism to ensure that utilities would actually build the infrastructure needed to keep the lights on. Indeed the only thing in that policy that forced the utilities to invest in new infrastructure the NFFO is the very thing the Tories are now scrapping.
A lack of a credible UK energy policy since then has led to many short term decisions which have had long term consequences. And this has ultimately led to the UK being hugely dependant on gas, much of which is now imported and the price of those imports is extremely volatile and can only go one way (that being up!).
In short only a radical change to this energy policy, which means actually more green tariffs, or perhaps better yet a carbon tax, or nationalisation of much of the energy sector is whats needed to get things back on track. And anyone delighted with the £50 saved wait a few months or a year for those savings to be wiped out while the utilities report yet more bumper profits and large bonuses to bosses.