Last year’s question was who would be left standing in the UK retail energy market. This year’s is who should pay for upheaval in the market and how regulation needs to change.
Next year, and the year after, and the year after that? More of the same. Bad news if you’re not an energy regulation enthusiast.
The pressing issue, as laid out by my colleague Claer Barrett, is the unfairness of the government’s proposals to help households cope with a 54 per cent jump in energy bills to £1,971 come April. These are oddly designed and insufficiently targeted on those who need help most.
That headline rise doesn’t tell the whole story. The cap isn’t a limit on how much customers can spend on energy: instead it sets a maximum for what suppliers can charge per unit of energy, and on the daily standing charge for connecting a home to the grid.
The latter is an old bone of contention. Former Ofgem economist David Osmon has argued for years that the original price cap methodology set the standing charge well above the cost of hooking a household up to the system. He says that created an incentive for new entrants, who Ofgem acknowledges were not properly vetted, to chase customers with loss-leader tariffs.
Higher fixed costs penalise those who tend to use less energy, notably low income households and (entirely less sympathetically) the owners of second homes. There is also evidence that low income households were more likely to be on default tariffs, and less likely to have saved money by switching suppliers before this crisis hit.
Which brings us to the £693 rise in the price cap, based on a typical household. The bulk of the rise reflects higher wholesale gas prices. Suppliers can choose how they structure their tariffs between fixed and variable elements. But Osmon argues the standing charge rose by about £75 in that: households that can’t pay by direct debit, which tends to be those in a more precarious financial position, will be paying more than £300 a year including VAT before they’ve even switched on a light.
The generally impenetrable material from Ofgem is tough to navigate. But most of the rise in the standing charge was down to the costs of failed suppliers, aka the costs of failed regulation. And this is being distributed across the market in what looks a regressive way that disproportionately hits lower usage households.
It could have been worse. A recent change meant that these charges for failure were passed on mainly through higher unit costs for gas, which also vary more from household to household. (That at least means that when you’re cuddling your pet for warmth to save on gas central heating it makes a more meaningful difference to the bill). But this is firefighting for the current crisis, as with several other regulatory changes proposed.
The thing is that the broader issue of fixed costs in the energy system is looming ever larger. So-called policy costs are rising as previous subsidies hit bills. And the demands of transitioning away from a fossil fuel-based energy system will require a network that is much more sophisticated and more expensive to run.
Considerations of fairness should be central. Otherwise, as we’re seeing now, rising costs will be seized upon by energy transition sceptics as a reason to procrastinate and delay. Nor are there easy answers.
Sure, recovering more costs through charges on energy usage incentivises efficiency. But should those who can afford to insulate their homes, install solar panels or switch gas boilers for heat pumps benefit while the increasing costs of running the system are shared with those who can’t? Is it right that future consumers using dynamic tariffs to charge an electric vehicle off-peak might avoid some of the costs of the additional network capacity that their car requires?
These aren’t necessarily questions that can be answered in the context of the existing system.
Laura Sandys, author of Recosting Energy, argues that what will be needed is a total overhaul: one that severs the link between commodities prices and domestic tariffs as low-cost renewables becomes a bigger part of the system and that, like in the broadband market, charges customers based on whether they’re taking a basic, essential service or one with more bells and whistles.
Yes, we need a conversation about what fairness looks like in energy. This crisis is just the warm up for what is ahead.
