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Energy cap – wrong answer, wrong problem

Image: Amatya Rakshasa

Imagine you have just completed your weekly supermarket shop.  You get to the checkout, pack your bags and get ready to pay.  Then the person on the till informs you that as a standard rate customer, they will have to add a ten percent surcharge to your bill.  No doubt you won’t be shopping at that supermarket again.  But imagine if all of the supermarkets did the same thing.  What are you going to do then?

Probably you will start asking if there are any alternatives to being a standard rate shopper.  Fortunately, it turns out that there is.  If you switch to a different supermarket and agree to pay for all of your shopping in advance by direct debit, they will offer you a temporary lower rate (although you will have to go through this rigmarole every 12 months or so).

But how can you pay for your shopping in advance?  Clearly neither the supermarket nor you has the first idea what you will be buying six, nine or 12 months from now.  That’s okay though; the supermarket will estimate your annual shopping bill and then charge you 12 equal monthly instalments.  As these will be estimates, the supermarket will probably end up owing you money at the end of the year.  But don’t worry.  Through a somewhat torturous application process, you will be able to get a refund… eventually.  They will try to deduct this from next years’ bill.  But if you are prepared to fight your corner, you may get your cash back.

On the other hand (although less likely) the supermarket may underestimate the cost of your shopping.  This will lull you into thinking that your standard of living is better than it actually is, and may persuade you to spend money elsewhere.  The trouble is that at the end of the year the supermarket will check what you actually owe and update your payments accordingly; in which case you will be getting a nasty additional bill just in time for Christmas.

If this sounds like lunacy, that is because it is!  But it is also the way in which the lunatics that devised the quasi-market for what is in reality a natural monopoly in energy supply in the UK.

Privatisation and quasi-markets

The ideological dogma behind the way British people are obliged to pay for their energy holds that “free markets” and “competition” are laudable aims in themselves.  But where there is a natural monopoly – such as in the provision of utilities – there can be neither competition nor free markets.  Just as there is only one road network and one system of water and sewage pipes and infrastructure, so there is just the one electricity grid and one network of gas mains.  This is very different to, say, shops and supermarkets; which anyone with the necessary capital can set up in competition to those that already exist.  The energy companies – particularly the “Big Six” cartel – had to be created by the state as quasi-competitive organisations.  However, they are in many ways like banks – licensed by the state to issue currency/supply energy, by restricting access to the necessary infrastructure (the interbank payment system/the energy grid).  And while there has been some small-scale entry into the “market,” the amount of capital that would be required to genuinely compete with the established companies is too great to be a realistic proposition.  And unlike setting up a supermarket, you cannot simply build your own grid infrastructure (or interbank payment system).

Instead, Britain has Ofgem; a state regulator that sets the rate of profit that energy companies are allowed to make (a rate, by the way that is far higher than the very low profits seen in genuinely competitive sectors of the economy since the crash of 2008).  The companies themselves, however, are free to choose how to go about making these profits.

The ubiquitous solution was to take a leaf out of the banking and finance playbook.  Set a high standard price, but then use lower introductory price to lure potential customers in.  In exchange, however, the companies got to hold on to their customers’ overpayment cash and either use it to finance their operations (saving on debt costs) or invest it (earning interest).  In effect, energy customers have been paying (in lost savings) for their own discounts.

When the electricity system was privatised in 1990, billing issues were not seen as a problem.  Britain was awash with cheap North Sea oil and (especially) gas which could be used to generate cheap energy; backed-up by the legacy fleet of coal and nuclear power stations.  It was also in the optimistic take-off phase (financial deregulation had occurred just four years previously) of the unsustainable credit bubble that crashed in 2008.  The credit boom drove up house prices and flooded the UK with a massive injection of new purchasing power.  It seemed like we had entered a new era of cheap energy and rising living standards.  Fast forward to 2017 and access to cheap credit has all but dried up for ordinary households.  Meanwhile the cheap and abundant oil and gas has gone and the coal and nuclear power stations have been retired.  With every day that passes, the UK is becoming more dependent upon far more expensive renewables, nuclear and imported gas.  Energy bills are getting harder to pay… so much so that even the Tory government is introducing an energy price cap that just two years ago it dismissed as a Trotskyist policy.

Standard Variable Tariffs

Of particular concern are the millions of British households who have slipped into energy and food poverty in the course of the post-2008 depression.  These make up a large part of the 66 percent of UK households who remain on energy companies’ expensive standard variable tariffs (SVTs) despite having theoretical access to much cheaper fixed-rate deals.

This 66 percent figure is actually something of a success for governments and regulators who desperately wanted to believe that the solution to higher energy prices was to encourage customers to switch suppliers in order to stimulate competition.  Nevertheless, it still means that 19 million UK households are paying more than they might otherwise do for their energy.  Inertia may account for some of this – as with the banks, many of us simply assume that all of the energy companies are more or less as bad as each other and so there is little to be gained from switching.  There may also be some wealthier households that simply prefer to avoid the hassle of switching even if this comes at a cost.  There may, however, be a far more visceral reason why millions of households remain on SVTs.

According to the regulator, fifteen million of the households on SVTs pay by “non-prepayment methods.”  That is, like our beleaguered supermarket shopper, they just want to get their shopping, head to the checkout and pay for what they have used.  There is good reason for this – particularly if you are struggling on an income that has barely risen in a decade even as post-Brexit inflation has more than doubled your household bills.  Even more so if you are one of the growing army of British people making do on one or other of several in-work of out-of-work benefits.  As Matty Edwards in the Independent reminds us:

“More than a million energy customers have been overcharged a total of £102 million over the last year because of billing errors, new research has revealed.

“Nearly 1.3 million households were forced to pay an average of £79 more than they owed, and some are still waiting for a refund, according to a study by price comparison website uSwitch.”

This is an ongoing saga that has had an annual outing in the British media ever since the energy industry was privatised.  Why wouldn’t the energy companies – particularly the “Big Six” cartel are going to overcharge their pre-payment customers?  After all, this was the whole point of offering a discounted rate to customers who agreed to sign up to a direct debit prepayment.  It guaranteed the income of the company for 12 months ahead in a way that the SVT never could.  It also removes the risk of customers defaulting.

However, the prepayment system is designed to save money even as it inconveniences customers.  As Money Saving Expert point out:

“Many can save £100s a year by switching. But when people do switch, bill confusion leaves many thinking they haven’t gained. For example, it’s possible to move to a cheaper energy company, only to find your direct debit rises. This is because it’s estimated wrongly, but you’ll get a refund later so you’ll still save…

“While there are problems, there’s one important fact in favour of setting up a monthly direct debit. It’s usually around 7% cheaper than any other way of paying.”

This is precisely the kind of advice that affluent people offer to other affluent people.  It is also why so many affluent media editors and affluent politicians fail to understand why so many people simply refuse to sign up.  If, however, you are one of the UK’s army of working poor, existing just one meagre payday away from the foodbank and the homelessness shelter, that initial overpayment on your energy bills is the difference between feeding your family and going hungry.

For the growing army of people who find themselves in this position, SVTs are the only means of managing their household budget.  They can afford neither overpayments nor underpayments (that come with a nasty additional charge later on).  They must have a month by month means of paying for what they use; no more and no less.  And if the cost of doing that is too high, then it is preferable to save money by shivering in the dark than to risk the vagaries of the pre-payment system.

Smart meters

The one saving grace was supposed to come in the shape of smart meters.  These devices are supposed to be capable of monitoring energy use in real time and then relaying that information to the supplier.  The promised result was meant to be real-time accurate billing.  As Emma Munbodh in the Mirror recently gushed:

“Smart meters are digital real-time devices designed to give bill payers greater control over their usage – and their spending.

“The gadgets are time – and money – saving and are able to automatically send meter readings to the supplier – therefore transforming bills for those on prepayment plans.”

This is actually a techno-fantasy, as the communications infrastructure that would allow smart meters to do that has yet to be built, and may even be too resource-intensive to ever be built.  In reality, smart meters are little more than expensive toys that give an estimate of a household’s energy use.  They do nothing to solve overcharging issues.  As Amelia Murray in the Telegraph explained:

“The problem of inaccurate billing – where suppliers rely on estimated bills – is not being addressed by the Government’s multi-billion pound ‘smart meter’ programme… Smart meters are supposed to ensure ultra-accurate billing because usage is sent by the meter to the supplier automatically at regular, frequent intervals.

“But claims that smart meters will ‘put an end estimated bills’ are untrue, said Mark Todd, from energyhelpine, the comparison site.”

According to Todd, the only benefit of smart meters is that they save the energy companies the cost of sending out engineers to read our meters.  They do little for ordinary households beyond adding an additional charge to already high bills.

Energy caps

The proposed solution from the current government is to impose a cap on the cost of SVTs.  This will work by limiting the difference in the rate between a company’s SVT and its lowest tariff. However, even this will take months (possible years) to legislate for because of the administrative chaos caused by Brexit.  In any case, it will not work simply because it is a classic affluent person’s solution to the kind of poverty they have never experienced.  It will provide most benefit the small proportion of SVT customers who are affluent, by providing the biggest savings on the highest energy use.  But for the millions of UK households that respond to rising prices by turning off the lights and heating, the cap will lower their annual bills by pence rather than pounds; and so will do little to alleviate their money problems.

The wrong solution to an existential predicament

The energy cap will end up upsetting everyone and solving nothing.  This is because, while the failed quasi-market arrangements are an irritant, they are not the true cause of the problem.  The same arrangements were in place in prior to 2008; when complaints about overcharging and switching supplier were limited to the affluent classes.  It isn’t the system that has changed; it is the broader operating environment.

The harsh reality is this: the cost of energy is rising remorselessly.  The cheap North Sea gas, on which Britain built the current energy infrastructure, is gone.  In its place are increasingly expensive gas imports – something that the eye-wateringly expensive fracking of UK shale deposits is not going to change (assuming there is any gas to recover).  Renewables only appear cheap because of the sleight of hand of measuring cost per Kw/h at the point of generation (rather than the point of use).  None of the infrastructure and balancing costs are included, nor are the efficiencies and relatively low (25-30 years) lifespans of renewables factored into comparisons with coal, gas and nuclear plants (that last for 50 or 60 years).  Nevertheless, with fossil fuel availability falling, and nuclear having a few popularity problems of its own, renewables are going to become the greater part of our energy mix whether we can afford it or not.

Here’s where government price caps fall down.  One way or another, the energy infrastructure has to be built and maintained.  Indeed, if you want the additional energy required for a growing economy, you need to build a lot more energy capacity.  Someone has to pay for that.  And if we are sticking with the current quasi-market arrangement, that someone is investors.  And nothing drives private investors away from a business faster than state-imposed price caps.

The other side of our predicament is that as access to cheap energy goes away, so productivity (which is merely the use of technology to harness and focus increasing amounts of energy) falls like a stone.  The result is that it becomes increasingly difficult to maintain profits in the hi-tech manufacturing sectors that ultimately shore up the value of the Pound.  Instead, more and more of us are funnelled into low-paid/low-profit, and usually highly manual sectors of the economy; with employers using devices like gig-working and zero-hours contracts to hang onto their profits.

The solution to this is to find a new source of cheap energy.  The problem – which is why this is a predicament – is there is no such cheap energy.  So we are stuck with rising energy prices – which filter through into inflation in general – even as wages fall across the economy.  And there is no way out.


Without a cheap energy, our fate is ultimately sealed.  However, there is a means of delaying the spiral of decline.  This is to accept that the quasi-market experiment has failed.  The energy companies themselves claim they are caught in a “death spiral.”  Now – while we still have room for manoeuvre – is the time to give them a mercy bullet.

Because of the graft in the system (in which customers are forced to subsidise investors, and the true cost of various forms of generation are hidden) we desperately need to bring everything back under one roof.  Whether this is done as an entirely public enterprise (recreating the old Central Electricity Generating Board) or as some kind of public/private partnership is of lesser importance.  What matters is that cost is made transparent and investment decisions are rational.  Because if – as seems to be the case – renewables like wind and solar can only operate with gas, coal and nuclear baseload, or hugely expensive storage, then we all need to know that and to make our decisions accordingly.  In an energy-scarce environment, we must get the best possible energy return on investment.

There is also an imperative to prevent the likely company failures that will result from a combination of rising energy costs and falling living standards.  In another sector just days ago, a British airline company left thousands of people stranded around Europe when it filed for insolvency.  That is how private companies crash; suddenly and without prior warning.  We simply cannot risk energy companies crashing in a similar fashion.  By bringing energy beneath a public umbrella, we can provide the best guarantee that we have (the state’s ability to print currency) to keep the system running.

Ultimately, of course, if the UK cannot find a means of producing cheap energy, then it will hit a balance of payments/currency crisis as foreign governments and investors refuse to extend any more credit.  At that point, the UK will join the Third World.  Nevertheless, while private ownership has served only to extract wealth from the energy industry, public control may, just, provide the space and the research and development funding to provide cheaper energy with which to boost the flagging economy.

This, I believe, is a vain hope.  Indeed, as the wider world follows the UK down the road of rising energy costs and falling living standards, finding even a temporary fix may be beyond us.  But if we are not prepared to try, then our fate is already sealed.

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