Green taxes on bills lower than estimated


11:20 am - April 30th 2012

by Newswire    


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Without reform to the energy market consumers could miss out on as much as £1.9bn in 2020 in cheaper energy bills, according to a new report published by the think tank IPPR today.

The report also finds that costs to suppliers of delivering environmental and social obligations may be less than even Ofgem estimates.

The report argues that tougher regulation of the energy market is needed by regulator Ofgem to improve competition and to ensure that pricing is fairer for consumers.

It says the ‘Big Six’ energy companies are continuing to overcharge their existing customers to subsidise cheap offers

As a result some families are paying as much as £330 more than their neighbours to use the same amount of energy from the same company

Will Straw, IPPR Associate Director, said:

Our research adds to the growing body of evidence that competition is not working in the energy market. We are calling on the Big Six and Ofgem to demonstrate whether efficiency savings are being achieved in the energy market and whether consumers are benefitting from lower bills as a result, as we would expect if competition was working.

We need more competition among energy companies so that households get a fairer price for their energy. Ofgem’s previous attempts to reform the market have not delivered the changes needed. UK consumers cannot afford further delays in bringing down bills.

IPPR recommends that:

– Ofgem addresses the problem of overcharging and loss leading by enforcing its own policy that energy companies must offer tariffs that are reflective of their costs.

– Ofgem should reconsider its proposals for tariff reform and consider restricting suppliers to offering a fixed number of tariffs

– Ofgem should consider fully the needs of independent generators in its proposals to improve wholesale market liquidity and consult on the full range of reform options for the market, including a return to a pool

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Reader comments


This ‘Will Straw’, he’d be the child of Jack Straw would he?
When Dad isn’t extraordinarily rendering prisoners for torture isn’t he a £30k a year consultant to a City commodity trading firm?

Glad to see ‘is boy’s’ got a foot on the greasy pole and really ‘working’ for a living.
His witterings to the energy consumer are about as much use as a chocolate teapot.

How’s the world price of molasses Jack?

“Glad to see ‘is boy’s’ got a foot on the greasy pole and really ‘working’ for a living.”

In fairness, he was a chemical salesperson at 17, so he’s always had the motivation to work.

Competition not working in a privatised market monopolised by a cartel? Customers not seeing the benefits? Well, I’ll go to the foot of our stairs…

4. Chaise Guevara

@ 1 Barrie J

Any objections other than a same-brush-tarring ad hom attack?

5. margin4error

erm – ignoring petty celebrity rubbish about who the spokesperson is – does anyone have an opinion on energy? Our government doesn’t seem to – what with electricity market reform proposals now delayed for over a year – but probably some one should.

If the cost to the consumer of renewables is not as high as estimated by those opposed to renewables – that’s good news. If, however, energy markets are failing to serve consumers and failing to invest adequately in new capacity – that’s actually important.

The fact that some kid go over-promoted very young because his dad was famous hardly seems relevent in comparison. Politics is a very nepotistic place closed off to most types of people – as Andy Burnham said throughout his labour leadership campaign.

That doesn’t mean, however, the public should be distracted from policy.

The IPPR report suggests that the “green taxes” are lower than estimated, only £81 per customer instead of £90, based on their own speculative numbers (which include a mere £3 cost of the feed-in tariffs for wind and solar power – less than the estimated cost for solar alone, while wind power subsidies cost £7.74 per household last year). Hence the headline. The difference between their estimate for the cost per consumer of feed-in tariff and reported data accounts for virtually all of the £9 reduction in “green taxes” that they allege.
The writers seem to have a fairly shallow understanding of the market if they don’t understand why British Gas has a higher bad debt cost than the Northern Ireland monopoly.

“wind power subsidies cost £7.74 per household ”

To put this into perspective the average household bill is roughly between £1200 and £1400 depending on region – so the wind power subsidy is less than 1% of the total bill. Its also worth reading up on OFGEM’s project X research papers that model the various scenarios on energy prices in the future, and conclude that investing in new energy supply (renewables and nuclear) now through ‘green taxes’ saves the average household substantially over the long run over simply removing subsidy and waiting for fossil fuel supply to further decline and raise prices.

Worth pointing out as well that the market price for energy does not reflect its true cost/externalities, which if we had a global power capable of imposing and enforcing a pigou tax would change the investment calculations made by everybody overnight.

@ Planeshift
Fair comment. I was just pointing out that the £3 figure for cost of feed-in tariffs was implausible.

“The report argues that tougher regulation of the energy market is needed by regulator Ofgem to improve competition and to ensure that pricing is fairer for consumers.

It says the ‘Big Six’ energy companies are continuing to overcharge their existing customers to subsidise cheap offers”

Eh?

We’re going to improve competition by banning the cheap offers that are competition?

10. margin4error

Planeshift

it is interesting to note that there has been almost no work on the eventual cost of not building new infrastructure now. We’ve seen a lot of uncertainty in energy. Relatively cheap power supplies like on-shore wind farms face political risk (planning and public opposition) while politically safe options like offshore wind are very expensive. We’ve seen major investors walk away from nuclear and from bio-energy projects because political uncertaincy makes the returns too hard to rely on. Electricity Market Reform has been seemingly shelved, but without anyone saying so, which adds yet more uncertainty – and we are getting by energy-wise as an island now only because Scotland had some brave leadership willing to invest and because the government has shrunk the economy, which in turn has diminished energy demand.

At some stage this is all likely to see a relative boom in energy investment as bills rise to reflect an increasing shortage of supply – but with little by way of technical capacity (not enough experts to build lots of plants at the same time) the cost of building new generators is set to rise too.

And yet people whinge about a few tiny subsidies that help to mitigate the on-coming storm.

We really do live in a special country.

For avoidance of doubt: complaining about blatant errors in arithmetic is NOT “whinge(ing) about a few tiny subsidies that help to mitigate the on-coming storm.” I should be quite willing to fund through my taxes a few subsidies if they did help mitigate an oncoming storm.
I am, however, less happy about New Labour’s “Sheriff of Nottingham tax” that is providing, over the next twenty years more than £20 billion in subsidies to the well-off to be paid by their poorer neighbours as part of their fuel bills. If I replaced my efficient solar water heating panels with relative inefficient solar PV panels, then for every kilowatt-second they exported to the grid I should be paid nearly TEN TIMES the rate that the grid pays to a mainstream generator: and this would not come out of taxes on bankers but from the pockets of those too poor to install PV panels!
Secondly, the obsession with wind-power means that *more* coal is being burned, at significant environmental cost, in order that the more efficient CCGT stations can be kept spinning idle so that they can replace wind-power when the wind drops. This worsens pollution and greenhouse gases.

12. Planeshift

“It says the ‘Big Six’ energy companies are continuing to overcharge their existing customers to subsidise cheap offers”

Eh?

We’re going to improve competition by banning the cheap offers that are competition”

(arrrgh wordpress is eating my comments again)

Tim,

What this means is that existing customers are being overcharged to subsidise promotional efforts aimed at attracting new customers. As you are no doubt aware, there is still inertia amongst many consumers (with a whole list of reasons why I can add here – needless to say energy companies themselves carry some of the blame) and the market does not reward customer loyalty.

Furthermore one allegation against energy companies is that they set direct debits at a low level for new customers, so the customer builds up arreas. The year long contract then ends and they jack the price up. Unless you can afford to clear the debt instantly then you are stuck with your company and cannot switch. Hence IPPR noting that existing customers get overcharged to attract new customers.

Another issue is that there are too many tarrifs and complex pricing. This makes it difficult to compare companies (price comparrison sites are a start but can be misleading and inaccurate) and tarrifs. Many consumers do not know how their bills are calculated and whether it would be cheaper to switch – something not helped by the systematic mis-selling that used to occur on the doorstep and something energy companies have been fined for. OFGEM are as we speak looking at ways to improve price transparency. As somebody who believes in the free market surely that is something you welcome?

13. Planeshift

@ John – thanks for the clarrification. I did have a lengthy comment but it got eaten again.

You do have a point about the way the charge has been imposed in a regressive way. But it is still a small fraction of the average bill, and all the modelling that has been done on this says it helps to mitigate against the coming storm – the modelling I’ve seen suggests we have lower prices compared to the option of doing nothing from about 2018 onwards.

I’m not going to get into the technicalities on wind power, as the figures produced are usually partisan from one side or the other – and I’m not qualified enough to know that level of detail. But historically speaking almost all forms of energy – especially nuclear – have had some forms of subsidy.

A furtherpoint is that micro-generation technology isn’t just being subsidised for wealthy households – the subsidy is enabling social housing providers to upgrade the stock. Worth bearing in mind that if we leave insulation and micro-generation technology to the market then we will end up in a situation where wealthy households will have annual fuel bills of £50 in new houses, and poor people will be renting older homes without the technology and thus have fuel bills of £1,500.

@ 13 Planeshift
I don’t want to carp but the modelling that *I* saw compared “Renewables plus energy-savings” with “Nuclear/fossil fuels *without* energy savings”. I want commonsense. A decade or more ago I suggested that all new office buildings in the southern states should be obliged to have K-factor glass and use solar panels to power their air-conditioning; that wind-power be used *off-grid* to power non-time sensitive uses, as the Dutch do; that solar PV be used for third-world villages off-grid (Action Aid have thought of this for themselves and *done it*, also they’ve done mini-hydro power schemes); as much hydro/geothermal as is practicable; and that we replace coal with nuclear for base load and gas for peak.
Solar farms in Arizona and the Sahara once the technology is good enough.
Since the communists conquered China, more coalminers have died in China from mining accidents than have died in the whole world as a result from nuclear energy since the world began (including Hiroshima, Nagasaki, Three Mile Island (zero deaths), Chernobyl, Japan (no direct deaths from nuclear reported)).
Actually very few forms of energy have had subsidies historically (except in the Callaghan years to conceal the rate of inflation) and US nuclear is all, or almost all, unsubsidised private sector; UK Energy got into financial problems because Blair/Brown imposed the “fossil fuel levy” on it despite it not using fossil fuels – but I agree that EDF was subsidised while developing nuclear power; my solar panels are unsubsidised as were my father’s; hydro in the North of Scotland was subsidised initially to create local employment but that is now looking like a brilliant log-term investment. It makes sense to subsidise pilot schemes to test technology while developing improvements but New Labour rolled out mass use of grossly uneconomic technology for PR reasons.
” the subsidy is enabling social housing providers to upgrade the stock.” Yes, which is good, but not in blocks of flats, so it is relatively insignificant. In theory they could coat the south-facing wall of a tower block (above the third floor to minimise damage from yobs) with solar panels but I have never yet seen one.
I’m afraid I’ve got off the point which was that IPPR have made a mess of their research and the headline is wrong but if it wasn’t the amount would be trivial.

You’re right, I do like free markets.

“What this means is that existing customers are being overcharged to subsidise promotional efforts aimed at attracting new customers. As you are no doubt aware, there is still inertia amongst many consumers (with a whole list of reasons why I can add here – needless to say energy companies themselves carry some of the blame) and the market does not reward customer loyalty.”

“Another issue is that there are too many tarrifs and complex pricing. This makes it difficult to compare companies (price comparrison sites are a start but can be misleading and inaccurate) and tarrifs. Many consumers do not know how their bills are calculated and whether it would be cheaper to switch”

This is the way free markets work. Market segmentation.

The electricity supplier (any supplier of anything) obviously wants to charge the maximum that each individual customer is willing to pay. Clearly, if you’ve only got one price for everyone then you can’t do this. So you try a slice and dice the market so that you can charge those willing to pay more more than you can those who aren’t willing to pay more.

Organic veggies is an example. Profit margins on them (for both farmer and supermarket) are higher than on conventional veggies. So, you sell organics to those price insensitive to pay that higher margin and conventionals to those counting their pennies.

All the soap power companies have several brands aimed at segments of the market. This cheap one advertised by cheery no nonsense northern lass (just as an exmple, I’ve not seen UK TV for 20 years so I don’t know) and this more expensive one, almost certainly the same chemical formula in a different box, by a middle class southerner. If you like , distinguising between Morrisons Woman and Waitrose Woman.

This really is how such free markets work.

In ‘leccie, it tends to be disctiminating between those willing to spend the time to hunt a deal and those who don’t. The ;latter get charged more. That they are clearly more price insensitive also means that they probably should get charged more.

16. Planeshift

Tim,

That selective quoting could easily be used to imply you have nothing to say about the fraudelent mis-selling of tarriffs to customers. Your analogy with organic food is not relevent – a customer can clearly see how much they will have to pay for organic food compared with standard food. This is because supermarkets/shops etc have to display the price (and stick to it once they reach the till), and customers choose accordingly (no doubt some libertarians regard this as too much regulation)..

In the energy market customers generally do not know how much they will be paying for each product – all comparrison sites do is give estimates that have a great deal of uncertainty regarding them. Pricing is unnecessarily complicated and understood by few, consumers are locked into tarrifs with fees for early exit, direct debits are deliberately set low so they build up arreas, prices change over the course of a tarriff (except for fixed rates). This in an industry with a history of being found guilty of mis-selling and fraudelent behaviour by aggressive sales teams. The IPPR point out that the industry operates more like a cartel and make a number of suggestions aimed at reducing barriers to entry – exactly the approach one would have thought a believer in free markets would have supported.

But no, apparently it appears being a classical liberal now ammounts to supporting cartels, and defending fraud and misselling on the grounds that if you really really make the effort you can get a good deal. Its like saying we should release Bernie Maddoff from prison as only those who were apathetic and suffering from inertia fell victim to his ponzi scheme.

17. MarkAustin

We are never going to see transparent pricing without strong prescriptive regulation (on the lines of”charge this price per unit in these circumstances”) because it is not in the interests of the companies to do so. When I buy, for example, a toaster, there are many factors on which I decide: proce, colour, size, functionality etc. For the electricity to run it, there’s no difference regardless of who I get it from (with the exception of niche markets such as being prepared to pay a bit more for green power). If we had free and open pricing, what would happen is that everyone would very quickly switch to the cheapest, and everyone else would go out of business. Great if you’re that one. However, since the companies can’t predict who would be that one, they all prefer a system where they chug along with 20% or so of the market, but all stay in business. Prices and services thus need to be opaque enough to discourage shifters, and co-ordinated enogh to discourage new entrants without actually breaching monopoly regulations. This is a system where market failure is a feature of the business, and it cannot be eliminated. The only way the consumer can get fair open prices is by establishing a monopsony distributer buying from the suppliers and selling to consumers.

18. Robin Levett

@Tim Worstall #15:

…Many consumers do not know how their bills are calculated and whether it would be cheaper to switch”

This is the way free markets work. Market segmentation.

Would you please make up your mind about markets?

Your defence of what you call “free markets” generally is that free markets are best at properly pricing goods and services; that any form of restrictions on free markets, or subsidies to products within the market, will introduce inefficiencies.

I believe that you also accept the self-evident proposition – how could you not? – that free markets operate best in that regard when there is equality of information between sellers and buyers.

Yet here you are claiming that the fact that energy companies deliberately keep their customers in the dark as to such basic information as their tariffs is a positive virtue of free markets.

How can the consumer energy market possibly operate so as to produce an efficient price for energy if the consumers are denied that information? Why should the government not just set prices?

“that any form of restrictions on free markets, or subsidies to products within the market, will introduce inefficiencies.”

No, I don’t say that. I am all in favour of certain restrictions (perfectly happy about the inability of anyone to sell themselves into slavery) and I’ll even endorse subsidies for public goods.

What I do say is that the times, number of items, that this is beneficial is greatly lower than the number of regulations we currently have: or subsidies we currently piss away.

But that is a very different argument to the one you ascribe to me.

“I believe that you also accept the self-evident proposition – how could you not? – that free markets operate best in that regard when there is equality of information between sellers and buyers.”

Asymmetric information….well, yes, except that the original proof (the market for lemons) demonstrates that we cannot in fact have a second hand car market. Yet we do, obviously and observably, have a second hand car market (indeed there are recent papers showing that the internet has led to the information asymmetry itself disappearing). So clearly there’s something quite powerful that works around such asymmetry.

“Yet here you are claiming that the fact that energy companies deliberately keep their customers in the dark as to such basic information as their tariffs is a positive virtue of free markets.”

No, I’ve not said it is a positive virtue. I’ve said that’s how they work. All producers would like to slice and dice the marketplace so that they can charge different consumers the maximum amount that those different consumers are willing to pay. This is market segmentation.

Similarly, all consumers want to get what they want for the least they are willing to pay.

And it is the battle between these two that makes markets work in the way that they do.

Now, noting that there are two sides here, producers and consumers, why is it that only the producer has to be entirely clear at what prices he is willing to sell? Shouldn’t the consumer also have to provide exactly the same information: the maximum price which they are willing to pay for supply?

That would, after all, be the logical outcome of your “equality of information”.

“How can the consumer energy market possibly operate so as to produce an efficient price for energy if the consumers are denied that information?”

Consumers are not denied this information. It is just made difficult to find. So that producers can differentiate between rich bastards who will pay more and poor people who will scramble to find the information so they can pay less.

And all producers do this: Skodas are cheaper than VWs although they’re essentially the same car. Canny or cash strapped consumers work this out and differentiate.

“Why should the government not just set prices?”

Because this would be far worse. Politics just isn’t a great way to set prices. Anyone really want to give Chris Huhne (as was) the power to set ‘leccie prices?

20. Robin Levett

@Tim W #19:

Now, noting that there are two sides here, producers and consumers, why is it that only the producer has to be entirely clear at what prices he is willing to sell? Shouldn’t the consumer also have to provide exactly the same information: the maximum price which they are willing to pay for supply?

In a virtually inelastic market?


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