Energy companies have their own rationales as to why their prices need to rise. They argue that the UK’s distribution infrastructure needs a great deal of investment to keep it up to standard. Additionally, they cite rising wholesale costs which are out of their control, as the UK is no longer self-sufficient for its energy needs. This is as well as the compulsory green levies that make up a (new even smaller) proportion of the total bill.
As an example, British Gas was at the forefront of the deregulation of the energy market back in the 1990s. The end of its monopoly as a nationalised gas supplier led to it aggressively moving into the electricity market, offering ‘dual fuel’ tariffs. Recently, they announced that their dual fuel tariff would increase by 9.2% - well above the rate of wage inflation. They justified this price hike by the using fairly bog-standard excuses, and by saying that their profits were only 4%-6% of their total turnover. It is worth digging a little more into these figures, though, as a further 9%-11% of the total turnover of their gas and electricity business is listed as being “operating costs”, which by necessity include things like senior management salaries. It is also somewhat disingenuous for them to draw distinctions between delivery of gas or electricity to the customers’ premises, but then aggregate clean sustainable energy initiatives and taxes due under the banner “Government obligations and taxes” – a vast majority of this 11%-20% is taxes rather than expenditure on, for example, the laudable Carbon Emission Reduction Target and Community Energy Savings Programme initiatives.
The current government’s response to this approach is to publicly restate that the energy market is competitive and regulated to avoid collusion – although there have been accusations of this in the past. They have also mooted introducing a criminal offence relating to price fixing between the ‘Big Six’, bringing the energy sector in line with the banking sector. The opposition, under Ed Miliband, has taken a more radical and in many ways populist approach, by saying that they would legislate to freeze energy prices if they gained power at the 2015 General Election in order to restructure the energy market.
Although some have accused Mr Miliband of cynical realpolitik in appealing to voters’ basic needs – less expensive heat and power is always going to be difficult to argue against – it is possibly the case that he is gauging the mood of the country, and even subtly influencing it. Since the pledge to freeze energy prices until 2017, an increasing number of people have begun to question the nature of competition in the energy market. The perceived lack of competition, allied with the fact that there is a lack of transparency in the financial affairs of the organisations controlling a vast majority of energy supply, means that the level of public support for renationalising the energy market has grown markedly. After all, many say, wasn’t it that arch-socialist Winston Churchill who presided of the nationalisation of them in the first place?
So, what happens next? Tens of thousands of people have already signed up to the Labour Party’s petition calling on David Cameron’s Coalition government to follow the Labour Party’s lead in acting to freeze energy prices. Although this campaign is unlikely to work directly, it may well assist in bringing additional pressure to bear on the Big Six –smaller and more agile billing companies such as OVO Energy have already moved to distinguish themselves from the traditional oligopoly and may well take further market share from them as a result. The likely medium term result is that the Big Six will seek to position themselves as being responsive to the needs of their clientele – and some may decide to offer PR-friendly price freezes in order to pre-empt the 2015 election. They may even make offers intended to steal market share from their competitors, although this may be a far-fetched dream at present.
In the interim, the Coalition have chosen to concentrate on attempting to cut energy bills by scaling back the Energy Companies’ Obligation’s key efficiency target by 30% - as has been recently reported by the BBC. They promise to reduce each household’s energy bill by an average of £50 per annum, but at what longer term cost? Environmental pundits such as the BBC’s Roger Harrabin have already predicted that the perceived instability in the energy market may well drive up interest rates demanded by lenders providing finance for the £100bn needed to renew the UK's power system. It doesn’t take a genius to work out that this would be the next in the line of excuses used by energy firms to justify annual price-hikes. This would give further weight to the growing argument to taking the UK’s energy production and distribution infrastructure back into public ownership.