Labour Party leader Sir Keir Starmer has come up with a short-term, inflation-busting, and “fully-funded” solution to the predicted winter surge in domestic fuel prices in Britain (England, Scotland, Wales). His plan to avert fuel poverty was announced on 15 August 2022 and involves freezing the energy price cap at the current level of £1,971 a year, set in April 2022, for a six-month period from October 2022 until April 2023. The government will pay energy companies £29 billion to compensate for their losses, thereby preventing an 82 per cent rise in the energy cap to £3,582 in October. The proposal will be funded by raising £8 billion through an expanded windfall tax on energy companies (backdated to January 2022), while households will no longer receive the £400 grant promised by the Chancellor to help with their energy bills, thereby re-allocating another £14 billion. This sum will be further boosted by lower inflation-linked repayments on government debt as inflation falls with implementation of the plan, accounting for the remaining £7 billion.
Taking a different view, Conservative politicians, including the party leadership contestants, do not favour active market intervention, instead focusing on targeted financial support to households to help tide them through the anticipated forthcoming crisis. This support, as it stands, comprises a non-means-tested one-off £400 rebate on fuel bills for all households in October, and a means-tested £650 payment to low-income households. A third, more militant, strand- the Don’t Pay campaign-recommends non-payment of energy bills from 1 October 2022 onwards, evoking memories of the poll tax crisis in 1990. Non-payment, by cancelling direct debits, is a risky strategy, one that could lead to personal debt and a poor credit rating, in addition to having one’s gas and electricity cut off altogether.
The energy price cap sets a limit on the maximum price that an energy supplier can charge its customers on default, or standard variable, tariffs for each unit of energy used, and also caps the maximum daily standing charge for each kWh (unit rate) of electricity and gas supplied to a household. It does not cap the total cost of the bill, which depends on the amount of gas or electricity consumed, there being no upper limit to what one may have to pay. The price cap was introduced on 1 January 2019 to protect loyal customers on standard variable tariffs, irrespective of mode of payment (direct debit, standard credit), from rapacious energy suppliers keen to maximize their profits. The first energy price cap limit was set by the independent regulator Ofgem (Office for Gas and Electricity Markets) at £1,137 per year. Originally adjusted at six-monthly intervals, the price cap will now be set every three months. The cap does not apply to customers on fixed-term energy tariffs, which are usually set for 12 months at a time, and those on exempted standard variable green energy tariffs.
In the distorted energy market, consumers currently have little hope, if any, of benefiting from switching energy tariff or supplier. Far from providing consumers a choice of competitive low-cost deals and the ability to shop around-one of the touted benefits of privatisation- energy suppliers have increased their prices to recoup their supply costs and even penalised those tempted to shop around with extortionate early-exit penalties. In these tight circumstances, price-comparison websites have little to offer users. It seems, as suggested by Ofgem, that households on dual-fuel (same gas and electricity supplier) tariffs, paying by direct debit, may have the best possible deal and that those with smart meters are better able to monitor their energy consumption and cut back wherever possible.
The British retail energy market is currently dominated by the Big Six suppliers (British Gas, E. ON, EDF Energy, Octopus Energy, OVO Energy, Scottish Power), following the recent demise of many smaller suppliers. Retail prices reflect a combination of wholesale energy prices, as well as operating costs, network costs, energy levies, and VAT. High and volatile wholesale prices of oil and gas are a manifestation of energy insecurity, both in Britain and on mainland Europe, in the face of rising demand. Shortages of energy supply reflect Europe’s dependence on Russian oil and gas supplies, and Britain’s low gas reserves and under-investment in renewable energy generation, such as wind turbines.
As winter approaches, it is increasingly likely that financial pain will be felt in many British households. What is also clear is that the regulated and privatised energy market is not best placed to deliver true competition, fair prices, and a self-correcting price mechanism. Privatisation has created complex trans-national supply chains, with separate companies involved in generation, transmission, storage, distribution, and supply of gas and electricity, all highly susceptible to turbulence in the world of politics. While there may well be some winners in this capricious energy market, customers are not among them.
Ashis Banerjee