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Britain’s “big six” energy providers are feeling the heat. Theresa May’s pledge to end “rip-off” fuel bills could lead to a cap on the standard variable tariff paid by a majority of households in the UK. The sector is likely to face a more radical shake-up, should Jeremy Corbyn’s Labour party come to power.
Power suppliers are showing considerable agility in countering the immediate threat of regulation. Two of the biggest, SSE and Npower, are to spin off and combine their UK retail businesses to reduce their exposure to the market. Now Centrica, the parent of British Gas, has said it will scrap its standard variable tariff, replacing it with an “emergency” 12-month default tariff for customers who fail to shop around for a cheaper fixed-price deal.
Whether regulators step in, or whether companies act to pre-empt them, it seems plausible that the gap between the cheapest and most expensive tariffs will narrow, and that price-savvy customers will no longer receive such a large cross-subsidy from the apathetic majority as they have in recent years. It is questionable whether consumers need such protection from their own inaction. But even if there is little change in the average household bill, there is a real benefit in making people more confident that they are paying a fair price for energy.
Public trust in the system is especially important because the UK, like countries worldwide, is grappling with the problem of how to fund the necessary switch to clean energy. At present, there is a damaging lack of transparency over the costs of this transition.
Centrica’s chief executive, Iain Conn, argues that “green taxes” and other government policies that are funded through levies on energy suppliers are the main cause of rising household bills. He and others in the industry want the government to end this practice and meet the costs from general taxation. He has a point.
The true cost of UK policies to support green energy is hotly contested. Centrica says environmental and social policies accounted for £135 of an average power bill of £1,112 in 2016. Independent analysts, and the government’s own advisers on climate change, have different forecasts suggesting the costs are much lower. A great deal depends on the timeframe selected, how one accounts for the carbon tax and whether one factors in renewable energy’s impact in lowering wholesale prices.
A recent review of UK energy costs by the economist Dieter Helm suggests that UK households in fact pay less than the European average for energy — and less on taxes and levies. But green subsidies are significant and they have been higher than initially forecast: a “levy control framework” introduced in 2011 was supposed to cap the costs of three of the main schemes supporting low carbon investment, but costs are likely to exceed the cap in every year to 2021. The Helm review argues it would have been possible to achieve as much at lower cost.
At a time when poorer households are struggling with stagnant wages, cuts to benefits and rising prices for food, transport and other essentials, it will not be surprising if they begrudge paying for decarbonisation policies. Nor is it surprising that energy suppliers resent being blamed for high prices when the government has failed to regularly quantify and explain the impact of its green policies on household bills.
If the government is to win public support for the essential transition to cleaner energy, it must begin with greater transparency over the costs of its policies. Only then can it justify the costs and determine the fairest way to meet them.