How to stop energy bills rising so much – it's time to start cutting costs

Suppliers undoubtedly have an important part to play in keeping energy bills as low as possible for customers. Whether it’s procuring the energy they need up to two years in advance to protect them from price spikes, helping them save energy or simply making a fair level of profit, it is our responsibility to help our customers manage the cost of energy.

As a UK-based supplier, it's really important we do all we can to make sure that customers are on the most appropriate, cost-effective tariff for their needs, while making them aware of the savings they can make by paying through monthly direct debit or managing their account online. It’s cheaper for us and we pass those savings, which can be as much as £92 a year, on to the customer.

However, the majority of the costs that make up an energy bill are largely outside of suppliers’ control; they are determined by international markets or set by the Government or Ofgem.

In recent years, SSE’s profit margin in energy supply has been around 3-5%, or in the region of £1 a customer per week – it is a relatively minor part of the bill, but it is necessary in order for us to keep investing and running our business sustainably.

In the short term, there is little anyone can do to prevent volatility in an increasingly competitive global wholesale market or the need for investment in the UK’s energy infrastructure and networks – and clearly these costs account for a significant proportion of the bill. A recent report from analysts at Liberum Capital estimated that bills would need to rise by 100% by 2030 in order to pay for the required investment. That remains to be seen, and no-one can predict it, however action can be taken in other areas to mitigate this and we should be focusing on keeping down the costs we can control.

We’ve identified three ways in which, collectively, energy suppliers and the Government could act to help lower costs.

1) Put a cap on the cost of the Energy Company Obligation (ECO)

ECO is a government-mandated scheme requiring energy suppliers to deliver energy-saving measures in people’s homes, with various stringent sub-targets for the type of measures, properties, socio-economic and geographic groups through which the savings must be achieved. It runs for two years from January 2013 and is paid for by customers through their energy bills.

Reducing energy consumption is one of the most effective ways to keep bills down, and SSE supports any effective programme for improving household energy efficiency. However, we are concerned that – despite its many benefits – ECO is not a cost-effective means of achieving this goal.

Public data from the early months of the scheme has shown that the costs of delivering measures under ECO are proving to be far greater than the Government estimated. If it continues at current cost levels, as indicated from brokerage data (and there are a number of reasons why we think costs will increase as the scheme goes on), it will be 30% more expensive than DECC predicted, adding around £70 to the average dual fuel bill as opposed to the £53 envisaged by DECC. The reasons for this include lack of Green Deal uptake, difficulties in finding the right kind of customers and the more complex nature of the measures that need to be delivered, such as solid wall insulation. 

Also contributing additional and largely unnecessary costs are ECO’s complicated, bureaucratic requirements. We’re talking about 10 forms needing to be completed just to verify that a boiler repair meets ECO rules. It’s unnecessary red tape that comes with a cost and, ultimately, customers have to pick up the tab. It’s not just ECO, either. The costs of bureaucracy and red tape could be lowered in other areas, saving customers money.

Action must be taken now to ensure that ECO does not result in more households struggling to pay their energy bills. A simple solution is to cap the total costs suppliers pay to meet their ECO targets at an agreed level. This could be set at the £1.3 billion initially forecast by government. This would ensure that the costs borne by consumers to deliver a government policy remain affordable and do not jeopardise the effectiveness of the programme.

2) Use carbon tax receipts to fund energy efficiency measures

Over the next 15 years, the Government will receive an estimated £63 billion from taxes on carbon emissions, either drawn from auctioning of EU Emissions Trading System (ETS) allowances or from the UK’s own carbon floor price. Much of this is paid for by consumers through their energy bills and next year it is expected to cost each customer somewhere between £15 and £20.

Rather than simply being absorbed by the Treasury, as they are now, these funds could be invested into a centrally funded programme which seeks to improve the energy efficiency of UK homes. This would reduce consumer bills as it would not only lower consumption but could also negate some or all of the need to fund energy efficiency programmes through energy bills, as has been the case with programmes such as ECO, CERT and CESP.

This approach, which is being pursued by the French Government and is advocated in the UK by a coalition of consumer groups and energy companies, would remove a significant cost from energy bills and alleviate short-term fuel poverty while improving household energy efficiency over the long term.

3) Make sure everyone pays their fair share for government policies

At present, smaller energy suppliers (with fewer than 250,000 customer accounts) are exempt from the rising costs of delivering ECO, and are not required to offer customers access to the Warm Home Discount rebate. This adds up to approximately £106 in costs that these suppliers do not have to pass on to their customers (around £94 for ECO and £12 for WHD).

This creates three problems:

i) The costs are not collected equitably as some consumers can exempt themselves by choosing a smaller supplier. Typically customers of these suppliers are not from low-income households, as these suppliers do not offer them the Warm Home Discount rebate. They are also often more engaged customers, who have taken an active decision to switch their energy supply and are in a position to shop around. This could see more vulnerable customers paying more to fund these policies, and, with costs going up, this risks pushing more people into fuel poverty.

ii) It damages competition if, as a result of government policy, some suppliers are give more than a £100 head start on the prices offered by their competitors. This is a barrier to larger new entrants entering the energy retail market.

iii) Perversely, it could also act as a disincentive for smaller suppliers to grow their market share, as their costs and obligations rise significantly once they hit the 250,000 customer account threshold.

The exemption should be ended and those suppliers, and their customers, should be levied to fund these policy costs and ensure that the overall cost burden is spread equitably. At present, the cost of some government schemes, including carbon taxes and the cost of subsidies for renewables, are levied only against electricity bills. This means that those customers who only use electricity for their energy supply pay disproportionately more for these schemes, and again does not spread the costs equitably.

With people’s incomes being squeezed and costs going up, energy suppliers and the Government together must do all they can to keep bills down – and that starts with cutting unnecessary costs.

Many of the levers for this sit with the Government, and it is critical that policies paid for through energy bills are designed to be as fair and as cost-effective as possible.

The steps I’ve outlined here are just a few examples of how this could be achieved.

This blog first appeared on UtilityWeek.co.uk and can also be viewed here.