Quick fixes won’t stop rip-off Britain

Profiteering by the Big Six isn't to blame for the huge rise in energy prices.

It is cheap to reform, could help bring down inflation, increase household income and it's a vote winner. So reforming the energy market should be a no-brainer for the government, right? Wrong.

Energy bills are the number one financial concern for the public, ahead of the cost of food and housing. The average dual fuel energy bill has increased by 75 per cent since 2004, energy companies received four million complaints last year and overcharging of loyal (often poor and old) customers is still widespread. But as with that other current target of public anger, corporate excess, the political debate is failing to make much headway with public opinion.

David Cameron's attempt to make the running on this was an energy summit held back in October last year. The only tangible outcome from the summit was action to make it easier for people to switch suppliers to get cheaper bills. Yet despite the hard times, even less people are switching now than five years ago. Over 60 per cent of people have never switched, many have no intention of doing so and those who most need to - the elderly and those on low incomes - are least able to. The coalition and now new Energy Secretary Ed Davey need to have an answer beyond simply trying and failing to increase consumer engagement in the market.

Right-wing think tanks continue to lay the blame for price rises on policies to develop renewable energy, while failing to compare this with the cost of replacing our ageing high carbon power stations, as well as the high costs of doing nothing at all. But there are blind spots on the left too.

A campaign to end energy profiteering was launched yesterday by Compass in the Independent backed by a host of leading political figures. It rightly calls for action but puts forward quick fix solutions rather than a basis for lasting reform. A windfall tax is called for by the campaign as the way to claw back excessive profits from the Big Six and price caps to prevent the costs of this being passed onto customers. But it is not clear what, if anything, a one-off regulatory intervention like a windfall tax will do to prevent underlying problems in the market.

The blame for the huge rise in prices is pinned solely on the Big Six's profits, when we know that wholesale and distribution costs have driven over 80 per cent of the price increase since 2004 and social and environmental obligations seven per cent of this. The real issue is where the profits are being made. Regulator Ofgem's own research shows that between 2005 and 2008 the Big Six's total net profits came from just 48 per cent of their customer base - largely those still with the same supplier since before market liberalisation. These customers are being overcharged to subsidise cheap offers for customers who switch suppliers in the more competitive end of the market. Though some suppliers have stopped this, others continue.

IPPR analysis to be published this spring will show how removing some of the more inequitable and anti-competitive practices in the energy market could remove barriers to new entrants, extend competition and improve market efficiency to help exert downward pressure on prices. If after this the market is still failing to deliver the benefits of competition to the vast majority of the public, there would be a strong case for more fundamental review of the market.

The London mayoral elections show how quickly the electorate can respond on cost of living issues. Ed Miliband's Rip-Off Britain campaign may not be original but it could be effective if it can set out a clear route to reform that cuts through to the public. Above all the opposition should establish a strong pro-competition stance that it would be hard for the government not to follow. The 1 in 4 households who can't pay their energy bills need action soon. Until then, they'll believe it when they see it.

Clare McNeil is a senior research fellow at IPPR.

Clare McNeil is a senior research fellow at IPPR.

Twitter: @claremcneil1

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The tale of Battersea power station shows how affordable housing is lost

Initially, the developers promised 636 affordable homes. Now, they have reduced the number to 386. 

It’s the most predictable trick in the big book of property development. A developer signs an agreement with a local council promising to provide a barely acceptable level of barely affordable housing, then slashes these commitments at the first, second and third signs of trouble. It’s happened all over the country, from Hastings to Cumbria. But it happens most often in London, and most recently of all at Battersea power station, the Thames landmark and long-time London ruin which I wrote about in my 2016 book, Up In Smoke: The Failed Dreams of Battersea Power Station. For decades, the power station was one of London’s most popular buildings but now it represents some of the most depressing aspects of the capital’s attempts at regeneration. Almost in shame, the building itself has started to disappear from view behind a curtain of ugly gold-and-glass apartments aimed squarely at the international rich. The Battersea power station development is costing around £9bn. There will be around 4,200 flats, an office for Apple and a new Tube station. But only 386 of the new flats will be considered affordable

What makes the Battersea power station development worse is the developer’s argument for why there are so few affordable homes, which runs something like this. The bottom is falling out of the luxury homes market because too many are being built, which means developers can no longer afford to build the sort of homes that people actually want. It’s yet another sign of the failure of the housing market to provide what is most needed. But it also highlights the delusion of politicians who still seem to believe that property developers are going to provide the answers to one of the most pressing problems in politics.

A Malaysian consortium acquired the power station in 2012 and initially promised to build 517 affordable units, which then rose to 636. This was pretty meagre, but with four developers having already failed to develop the site, it was enough to satisfy Wandsworth council. By the time I wrote Up In Smoke, this had been reduced back to 565 units – around 15 per cent of the total number of new flats. Now the developers want to build only 386 affordable homes – around 9 per cent of the final residential offering, which includes expensive flats bought by the likes of Sting and Bear Grylls. 

The developers say this is because of escalating costs and the technical challenges of restoring the power station – but it’s also the case that the entire Nine Elms area between Battersea and Vauxhall is experiencing a glut of similar property, which is driving down prices. They want to focus instead on paying for the new Northern Line extension that joins the power station to Kennington. The slashing of affordable housing can be done without need for a new planning application or public consultation by using a “deed of variation”. It also means Mayor Sadiq Khan can’t do much more than write to Wandsworth urging the council to reject the new scheme. There’s little chance of that. Conservative Wandsworth has been committed to a developer-led solution to the power station for three decades and in that time has perfected the art of rolling over, despite several excruciating, and occasionally hilarious, disappointments.

The Battersea power station situation also highlights the sophistry developers will use to excuse any decision. When I interviewed Rob Tincknell, the developer’s chief executive, in 2014, he boasted it was the developer’s commitment to paying for the Northern Line extension (NLE) that was allowing the already limited amount of affordable housing to be built in the first place. Without the NLE, he insisted, they would never be able to build this number of affordable units. “The important point to note is that the NLE project allows the development density in the district of Nine Elms to nearly double,” he said. “Therefore, without the NLE the density at Battersea would be about half and even if there was a higher level of affordable, say 30 per cent, it would be a percentage of a lower figure and therefore the city wouldn’t get any more affordable than they do now.”

Now the argument is reversed. Because the developer has to pay for the transport infrastructure, they can’t afford to build as much affordable housing. Smart hey?

It’s not entirely hopeless. Wandsworth may yet reject the plan, while the developers say they hope to restore the missing 250 units at the end of the build.

But I wouldn’t hold your breath.

This is a version of a blog post which originally appeared here.

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