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.