Deciphering energy bills is a nightmare process. The complexity of variable, multi-tiered tariffs, discounts, taxes, levies and distribution costs make it very difficult to work out how much utility firms actually charge us for energy. It’s probably one of the reasons why more people don’t take advantage of the ability to switch to a cheap provider.
It gets even more difficult to understand where all the money comes from and goes to as you move up the business chain to a world of wholesale prices, subsidies, government budgets and feed-in-tariffs.
This is the problem with the energy market: nothing is simple. There are no easy answers to the issue of rising bills that don’t involve ripping up the countryside, dumping radioactive waste and provoking runaway climate change.
Even the supposed energy panacea of the moment, fracking, offers very little in the way of a secure solution because the UK is a small island operating within a European gas market and so is unlikely to see the transformation of the energy (and natural) landscape the US has experienced in recent years.
This week we’ve heard how the big energy firms are being “forced” to raise their prices, because rising wholesale costs and the government levy on bills used to invest in energy efficiency, renewable generation and to support vulnerable consumers. To be fair to SSE, which is putting prices up by 8.2 per cent, the company is making a loss at the moment. But then that hasn’t stopped it from increasing the dividend paid to its shareholders.
However, the situation is far more complex than can be summed up just by calling energy firms greedy or complaining about government subsidies for wind farms. The government says supporting renewable energy will keep energy costs lower than they would otherwise be in the long run, and they may be right.
While oil and gas prices have risen, the wholesale cost of power in Europe – which makes up the biggest part of our bills – has actually come down in the last few years due to falling demand, increased efficiency and an oversupply of energy from all the renewable installations that have come onto the grid, supported by various government subsidies.
Yet prices are at near record levels, not just because subsidy and investment costs are passed on to the consumer, but also because it’s harder for traditional utility firms to operate when they have to shut down their gas plants to prevent an oversupply of wind power overloading the grid.
Facing an increasingly uncertain position and an unstable policy landscape, the companies are also reluctant to invest at a time when we need to carry out massive upgrades to the grid and develop new forms of generating capacity to make the necessary curbs to our carbon emissions in order to prevent dangerous climate change.
The Royal Academy of Engineering this week became the latest group to warn of potential blackouts in the UK in the next few years, not because we need to build more power stations now but because the market isn’t functioning in the way we need it to.
Faced with such a complicated and confusing situation, it’s very difficult to know how we can address the problem. But I’ve come to two conclusions. Firstly, the UK needs to get used to the idea of paying more for power. The era of cheap energy isn’t just over; it was an illusion in the first place. Yes, UK energy prices may have been kept down in the last few decades by an oil boom that is inevitably if not consistently declining at the same time as global demand for energy is massively increasing.
But in previous generations we subsidised the fossil fuel industry (and to some extent still do), produced nuclear power without taking into account its radioactive waste and pumped millions of tonnes of carbon dioxide into the atmosphere in a way we now know is unsustainable. So we need to move to less damaging ways of generating electricity that will eventually come down in price but for now require large amounts of investment to get them off the ground (just as the oil and gas industry has had for many years).
My other conclusion is that politicians need to stop announcing headline grabbing policies that only attempt to address the symptoms not the cause of the problem. Labour’s suggestion of a price-freeze only further destabilises the situation and makes it even more risky for energy firms to invest the money we need them to. And the Conservatives’ suggestions that consumers should be automatically placed on the lowest possible tariff and be able to switch supplier more easily ignores the fact that competition for customers is a very small factor in the prices of the small number of firms that dominate the consumer market.
Where our energy comes from and how much we pay for it are two of the biggest challenges facing our society . Let’s stop pretending we can address them overnight with simplistic measures that in the long-run will only make things worse.