Tuesday 23 October 2012

Two sides to the equation

Fuel poverty is a real problem, and it is one which an increasing number of families are facing.  It is no surprise to see politicians competing with each other to offer 'solutions', nor to see newspapers competing to criticise the situation.  What is a surprise, though, is to see such a high degree of consensus suggesting that the 'problem' is to do with the price of fuel and that the 'solution' is therefore to find ways of reducing it.

For the Tories, in particular, such an approach seems to go against their usual belief in the ability of the market to set prices; not so long ago the idea that any government should intervene in the price-setting process would have been complete anathema to them.

It's true, of course, that the range of tariffs available is both large and confusing; it has become increasingly difficult to work out which tariff is the best one for any particular customer.  Whether that's a 'problem' or simply a 'feature' of a market in which suppliers are trying to compete whilst retaining customers and profits is a matter of opinion.

It's also true that energy prices in general have gone up significantly in recent years, increasing the number of people falling into the category labelled 'fuel poverty'. But whilst large and increasing profits may have played a part in that - blaming the energy companies is a sport that we can all play - it's not the whole truth.  Energy is a commodity of which a rapidly developing world is demanding every greater quantities, at a time when the extraction of some fossil fuels is becoming more expensive and when decarbonising the economy should be an environmental priority.  In environmental terms, using price to reduce consumption is not as entirely bad a thing as one might think from reading recent coverage.

Insofar as there is a pricing problem, it seems to me that it is partly a result of the way in which those who use the least pay the highest unit price; the worst excesses of energy wastage are happening as a result of usage by those who can afford the lower unit price they are often paying.  Adjusting tariffs so as to reverse that situation might be one useful adjustment to pricing which could be done without resorting to full-scale price regulation.

However, it is the other side of the equation, the one which is getting ignored, which interests me.  If people can't afford to buy the quantity of energy which is necessary to ensure a basic level of heating, then isn't it at least a possibility that the 'problem' is as much to do with incomes as it is with prices?  We have a very unequal - and becoming more unequal - distribution of income; wouldn't fixing that long term problem be preferable to trying to manipulate prices to provide relief in the short term? 


G Horton-Jones said...

Are there not at least three sides to the equation.
The choices of fuels for example
My house was built in 1829 the days of coal --remember coal £13.60 per bag and had four fire places, kitchen, living area and bedrooms
By 1970 these had been forgotten and oil central heating installed with the bedroom fires blocked up
In 1985 poverty led to a woodburner being installed to provide hot water and some heating
This was inadequate so an oil condensing boiler was installed using the 1970 radiators.
Oil prices are 5 times greater than in 1985
Gas is not an option here as we are beyond the current limits of supply by a few hundred meters
The point is that we have adapted our property to cope with the changes -few modern houses have that capability remember Economy7
designed houses
Not forgetting that we in Wales live on top of massive coal reserves but we are in fuel poverty as a result of UK government obsession with imported oil and gas
short term cheap long term disasteror is Wales being set up for a coal source when gas and oil run out or England can no longer afford these fuels

Welsh Agenda said...

Another aspect to this is the lack of central heating (by which I mean efficiently heating several buildings from one source as is usual in most developed countries) and lack of insulation in our buildings.

The poorest (and in deed most middle incolme) people in our society live in private rented accomodation, which is usually very poorly insulated (Landlord's dont pay the fuel bills so they have no reason to invest in insulation). Most landlords also use 6 month shorthold tenancies meaning that people are reluctant to sign up for longer term contracts with fuel supliers (if they are even given the option) which usually have lower tarrifs.

So in short, unless you are wealthy enough to have a mortgate or own a howm outright, or qualifiy for social housing (in which case your rent and bills are usually covered by benefits) you have the triple whammy of high rent, high fuel requirements and high tarifs.

G Horton-Jones said...

Welsh agenda
A substantial amount of the Welsh housing stock pre dates Central heating and insulation so this is a retrofit. That generation were used to cold houses ie internally frosted windows The current generation seem to be unable to operate if internal temperaures are not over 60-70 degrees fahrenheit
Tenants are not slow coming forward but rental incomes in many cases prevent major work being undertaken ie a switch from Oil to Gas for example or even boiler replacement
If you are in receipt of benefit and your bills are covered then your incentive to moderate fuel consumption may not exist

Cibwr said...

I had better declare an interest. I work in a call centre for one of the big six energy suppliers. The reality is that energy prices will rise substantially in the future. In part because international demand will push up the price of gas (and if we go the nuclear route - and I hope we don't then we will see soaring prices for uranium too) and partly because we have under invested in the gas and electricity grid and it needs upgrading. The government is not going to pay for that through taxes - so it will be paid through higher energy charges.

The third strand in price increases are the increased costs as a result of public policy. Most people are aware we pay more to pay for a growing proportion of our power generation coming from low carbon and renewable energy. What most are unaware of is the increased support for the fuel poor. Anyone who has an income less than around 16000 a year and paying more than 10% of their household income (the definition of fuel poverty) is eligible to claim a warm homes discount of £130 paid on the electricity account, that is paid for by the energy companies and hence one of the costs in your bills. Likewise people on prepayment meters, where the cost of collecting the payments is quite substantial, the unit costs are the same as people who pay by cash quarterly - that cost too is paid by the fuel companies and not the government and hence by all of us consumers. All the big six are offering their companies free insulation. This again comes at a cost to the fuel tariffs.

Yes the companies make profits, about 5% post tax profits - which is fairly much standard in industry and by no means can be described as excessive. And unlike many other companies, the energy companies pay massive amounts of taxation to the treasury.

We need to retrofit our homes so that they are as fuel efficient as we can make them and that will cost - we also have to decarbonise our economy and that will cost. World prices of oil and gas will continue to rise. I think you are right to point a finger at the growing inequality in wealth as a problem. As long as these trends and policies exist we will not see substantial reductions in energy costs to the consumers. Even if we removed the post tax profits from the energy companies the changes would be negligible. A little more reality in this debate would be welcome.

John Dixon said...


Completely agree. Whilst energy prices will vary in both directions in the short term, the long term trend is inevitably upwards, for a variety of reasons. Fiddling with the prices in the way that is being proposed is little more than a short term expedient - but it diverts attention from the long term problems, which are that we need to use energy more efficiently and that we need to address inequality.

I don't disagree with some of the points which others have made about choice of energy source, but we cannot escape from the long term upward trend in energy costs.