Andrew Warren

About every second week, the TV and radio newsbulletins include an item on either the electricity or the gas regulator. Usually the report highlights a dispute between the regulator and the companies regulated. Almost without exception, the focus is on the prices being charged. And, always, the pressure is on to cut them. Clearly, one […]

About every second week, the TV and radio newsbulletins include an item on either the electricity or the gas regulator. Usually the report highlights a dispute between the regulator and the companies regulated. Almost without exception, the focus is on the prices being charged. And, always, the pressure is on to cut them.

Clearly, one of the most appreciated aspects of the policy to privatise the electricity and gas industries has been the subsequent impact on prices. This has been particularly true for those operating in the industrial and commercial sectors.

British Gas was sold off during the final quarter of 1986. Ten years later, industrial gas prices had fallen in real terms by no less than 55%.

The sale of the electricity industry is more recent and was undertaken in tranches – the Scottish companies, the coal industry and nuclear power following later. The regional electricity companies were privatised in the second quarter of 1990. Seven years on, the average real price paid for electricity has fallen – not, admittedly, by anything like the amount that gas prices have fallen, but still by a very significant 10.5%.

Of course, these global figures mask a multitude of differing price arrangements. Among a handful of the largest energy-using companies, the picture has not been so rosy. Where previously they, and they alone, could negotiate lower tariffs, now such deals are open to practically any company of any size.

By simply switching supplier, or even threatening to do so, those responsible for the company’s energy bills have been able to cut, and cut again, their overall fuel bills. An entire new set of consultants – fuel brokers – has emerged. As they have prospered, so the traditional role of the energy manager has metamorphosed into one of energy buyer.

The result of this is simple. Fuel bills may have gone down. But energy consumption per unit of production is now higher than it should be – or would have been without privatisation.

The former government created an extremely sophisticated model of the energy economy. Sensibly, this model estimates that, in the short run, industrial energy demand is relatively unresponsive to changes in energy prices. But in the longer term – such as the length of time since privatisation – total energy demand is estimated to rise by about 4% for every 10% fall in energy prices.

As the Department of Trade & Industry conceded in a recent parliamentary answer: ‘The price-responsiveness of energy demand varies significantly across industrial sectors and types of fuel. Industrial electricity demand is estimated to be more price-responsive than industrial gas prices.’

But such a continuing decline in real prices has affected companies’ willingness to invest in traditional energy efficiency measures that would cut actual consumption. From all these figures, some stark calculations can be made.

The fall in fuel prices caused by privatisation has led to a 5% increase in emissions of carbon dioxide – the main global-warming gas – emitted by industry.

These figures are reached using the Government’s own price-elasticity calculations. The consequent price decreases have led to a 4.2% increase in electricity use; and a whopping 22% increase in gas use. That adds up to some 3.5 terawatt hours of energy consumption in 1996 alone that might otherwise have been avoided, had real prices remained constant.

This, in turn, has led to 9.3 million extra tonnes of carbon dioxide being pumped into the atmosphere each year – 3.3Mt of it coming from additional electricity use and 6Mt from additional gas use.

Currently, the industrial and commercial sector of energy use is only slightly smaller than the domestic sector. The option of being able to shop around among different suppliers is still relatively novel among householders. Only in the south of England, and then only for gas supplies, is that option available. But it is planned that, within two years, every domestic consumer will be able to buy fuel from any supplier, just as occurs in the commercial sector.

Price drops in the household sector have not had to wait for market liberalisation. The real price of both fuels for householders has dropped by 11-12 % since 1990.

While the DTI energy model wisely assumes less price responsiveness from the domestic sector, it acknowledges that there is a certain degree – enough, indeed, to have already increased usage by at least 2%. This, in turn, is leading to annual increases in emissions of 2.7Mt of carbon dioxide (1.5Mt from electricity, 1.2Mt from gas).

All this has occurred well before the benefits of full market liberalisation take place. Even now, Devonians are being offered blandishments to have their gas bills decreased by a further 25% at the stroke of a pen.

Privatisation of the electricity and gas markets may well have been a riotous success in financial terms. But it has been disastrous for energy conservation and the environment. And in the absence of counter-measures such as new grants or tax incentives to promote energy conservation, that disaster can only worsen.

Andrew Warren is director of the Association for Conservation of Energy.