Edward Davey speech to the Fair Energy Summit 2012
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Introduction Energy bills are a major expense for British households, and a significant cost for British businesses too. Ensuring that consumers get a good deal, with affordable bills from supplier...
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Energy bills are a major expense for British households, and a significant cost for British businesses too.
Ensuring that consumers get a good deal, with affordable bills from suppliers genuinely competing for their custom, is one of my top priorities. And I look forward to the contribution that this summit will make to debate in this area.
I want to set the scene by setting out some of the facts, and putting to bed one or two myths which I think have been muddying the waters recently.
Main drivers of bills
The first point to remember is that wholesale energy costs make up around half of household energy bills - even more for industrial energy users.
Wholesale energy costs have been the major factor driving recent increases in consumer energy bills.
For example, UK wholesale gas prices, driven by the global markets, have doubled since 2007.
Network costs have increased too, by around 20% since 2007, particularly the cost of transmitting and distributing electricity, as assets installed in the 1950s and 60s have been replaced, and additional network capacity added where needed.
Now let’s consider policy costs - that is, the impact on consumer bills of the obligations that Government places on energy companies for policy reasons.
Figures used by the industry itself show clearly that policy costs account for only a small portion of bills. Indeed, in 2011, the combined impact of all Government’s energy and climate change policies was around £90 on an average household dual-fuel bill in 2011. That’s around 7% of the total bill.
That’s dwarfed by the impact of wholesale prices, which are driven by global markets - but let me be clear: I don’t want to add a penny to energy bills that isn’t in the public interest. I am frankly fed up with commentators suggesting that the Government is deliberately increasing energy bills, when in fact we are doing everything we can to reduce them.
The bulk of the cost we add to bills is for supporting low-carbon technologies. That’s essential for environmental reasons - and I make no apology for ensuring that we will meet our legally binding carbon budgets and renewable targets - but it’s also essential for diversifying our energy mix away from fossil fuels.
That’s how we can insulate ourselves from those high and volatile prices on wholesale markets. In other words we’re adding a relatively small amount to bills now in exchange for reduced exposure to high prices in the medium and longer term.
As the independent Committee on Climate Change has confirmed, energy bills could be significantly higher in the coming decades if we do nothing to decarbonise the power sector.
Yes, our climate goals are extremely important. But I also want people to understand that, over time, our low-carbon policies are intended to keep bills down, not to increase them.
We also place obligations on energy companies in order to improve energy efficiency.
Again, this contributes to that 7% on the average energy bill now, but over time, as the energy efficiency of our building stock is improved, it will help reduce bills, with customers saving money as their homes or businesses require less energy to heat and power.
As a result, taking all Government energy and climate change policies combined, when we look forward to 2020, we estimate that, on average, household energy bills will be lower, not higher, than they would have been without our policies.
Of course, it’s all very well getting it right in the longer term - but I am concerned for people struggling to pay high energy bills now, especially those in low-income, vulnerable households.
We continue to encourage consumers to switch, and to promote collective switching. And we’ll be legislating to ensure that the confusing multitude of tariffs is replaced by just four, with consumers on “dead” tariffs automatically switched to the best for them, given their preferences, and with much clearer information so that consumers find it easier to shop around. Competition should work in all consumers’ interests.
But some need our help more directly. So the Government is giving all pensioner householders under 79 a £200 Winter Fuel Payment this winter; those 80 and over are getting £300.
And we have permanently increased the Cold Weather Payment, helping those most vulnerable to the cold, from £8.50 a week to £25 a week.
The Warm Home Discount scheme, worth over £1.1bn over 4 years, requires the big energy suppliers to reduce their lowest-income and most vulnerable customers’ bills. We expect around 2 million households to benefit each year as a result. As part of the scheme, this winter over 1 million of the poorest pensioners will automatically receive a discount on their electricity bill of £130 before the end of this month.
Other groups such as low income families and those on low incomes with long term illnesses and disabilities can also benefit through the scheme.
Yes, the energy companies will inevitably spread the cost of the Warm Home Discount scheme across other consumers. That’s part of the 7% policy cost, and it’s a part that contributes directly to fairness.
And the new Energy Company Obligation, or ECO, running alongside the Green Deal, will ensure that low-income and vulnerable households are helped to heat their homes more affordably in the long term. We estimate that energy suppliers will spend around £540 million per year on home thermal efficiency improvements for these groups, supporting around 230,000 households on low incomes or in low-income areas. each year.
The cost of ECO
Now energy companies have been suggesting that ECO will increase bills. I believe there is no good basis for this claim.
We estimate the overall cost of ECO at an average of £1.3 billion per year - that’s the same as the current supplier obligations, CERT and CESP, which are now coming to an end. So ECO should impose no new costs.
It’s true that there are some uncertainties about cost estimates. But I have to say that one of the key difficulties in reaching our own estimates has been the lack of transparency from the energy companies themselves.
They have not given us a clear picture of how much they were spending to comply with previous obligations. Nor do we know, for example, what their costs were for distributing over 300m light bulbs, often unsolicited. And we don’t know what costs they’ve been passing through to consumers.
So this Government has made sure we have powers in future to understand exactly these points - how much it costs the companies and what they are passing on to consumer bills.
Once ECO is underway, therefore, we will be better able to monitor and review costs, understand if they do appear to be higher than anticipated, and consider what we can do to mitigate that if necessary. I’m very happy to commit to keeping things under review in this way.
But as things stand, I’m confident that our estimate is a fair one. The arguments we’ve seen suggesting costs will be much higher seem to miss several important points, for example:
- the clear appetite from local authorities to work in partnership to help deliver projects at scale;
- the extra incentives the Government is putting in place, like the £125m cash-back scheme we’re launching in the new year to encourage take-up;
- and the fact that a successful Green Deal market will allow companies to lever in extra finance, reducing the amount they have to provide in ECO subsidy themselves.
In fact, tomorrow we have the first auction of the new brokerage mechanism that the Government has set up to facilitate links between the companies and the Green Deal market. I will be looking to see if the ECO companies make full use of this opportunity to make transparent and cost-effective deals.
The Government is straining every sinew to ensure that consumers get a good deal and to ensure that in future, even if fossil fuel prices continue to rise, British consumers will enjoy secure, clean and affordable energy.
We are playing our part. I believe it’s only fair for the energy companies to play theirs too.