We are in the season of energy company profit reports, and we are warned that the season of energy price increases will be upon us as the autumn chill arrives.
Companies are not usually defensive about making profits, it is losses which are normally the cause for embarrassment. However when energy prices are high and rising, increasing profits, even any profit, will never go down well with the public. A common perception is that energy companies profit in a comfortable market as hard pressed families struggle to pay their bills at a time when for many incomes are falling. The response from consumers is even more visceral when prices go up.
Competitive and transparent
Energy companies point to the challenges in the market and the need to make profits to invest and to satisfy shareholders, including the pension funds on which many of us are depending for our retirement income. However, where profits are made, it should be in a market that is fair, competitive and transparent. As the Energy and Climate Change Select Committee pointed out recently, consumers have reason to question whether the market is indeed competitive and thus working well for consumers. I take no pleasure in the distrust which clings to the industry. The energy market is simply too important for all our futures it to languish in a trough of consumer distrust.
There is a need for open and honest debate, not just a flare of outrage and then back to ‘grumble as we pay’. Of course, too many of our fellow citizens face tough choices of heating versus eating.
Obscure accounting
This debate is not helped by the fact that energy company accounts are dogged by the obscurity that comes with international accounting. Four of the largest six are foreign owned and their international accounts do not make it easy to judge how much money is being made in the UK. Some firms release meaningful data openly for public scrutiny, others provide meagre information hidden away.
Many energy companies are also vertically integrated businesses – they generate energy as well as sell it. In reporting profits they sometimes say, ‘we only make x% profit on selling energy in the retail market’ However, in part, this x% is based on the price they pay to their generating business, which also makes a profit, say y%. A more transparent presentation would be to talk about the profit (x% plus y%) made along the entire business chain – a ‘station to socket’ figure.
However, even if they make a profit on generation, companies are not likely to charge consumers less as a result. Despite any such profit, or loss, they will charge what the retail market will bear, as their shareholders would expect them to.
Government impact on prices
Energy companies, and others such as water companies, also point to the fact that some of the price they ask consumers to pay are charges determined by the UK Government and that these costs are rising. This is true. The UK Government has chosen to fund various objectives, environmental and social, through consumer bills. The ‘cost of living’ debate is now a bigger political issue than it has been for a generation and this practice raises tensions, not least between elements of the Conservative Party who are sceptical on the ‘green issue’ and Liberal Democrat Coalition partners.
Taxing consumption is not new. VAT and its predecessors have been with us for a long time. However, there is an increasing trend to fund things which as a society we think are necessary through consumers’ bills, rather than through taxation. Rail fares are increasing as the cost of the network are rebalanced from the tax payer to the ticket payer with the latter now picking up two thirds of the bill. However across utilities in general, certainly in energy, much of the investment required for the future will come from private sector investment; although it will be consumers who pay the bill eventually.
Who’s accountable?
There is an accountability issue here. Publicly funded expenditure is based on decisions in Parliament following debate when all the issues, including the impact on consumers, can be thrashed out. Where investment is privately funded the debates are behind closed doors and it is more difficult for consumers to be represented, although they eventually pick up the bill. Hence the importance of bodies such as Consumer Futures in making sure that the voice of the consumer is heard.
Where costs are met directly through consumer bills, Parliament agrees the scheme but even here accountability is obscured. Consumers sometimes do not even know they are picking up the bill – how many consumers know that they are funding energy efficiency schemes delivered by energy companies. Hence the concern over ‘stealth taxes’. A corollary of this is some companies argue they are taking the blame unfairly, that is acting as unpaid and unpopular tax collectors.
Not only do we raise funds for social initiatives through consumer bills, in some cases we give the job of delivering aspects of social policy to private companies, for example, the energy companies are tasked with finding vulnerable consumers and helping them with insulation. Are they best placed to do so? There are concerns at how difficult they are finding it, and hence how costly, they find it to locate such consumers. How do we hold them accountable for this outsourced bit of social policy?
The UK Government could of course choose to meet the costs of various objectives though taxation instead of encouraging private investment and asking consumers to pay, and it is a debate which needs to be had.
Last year we looked at that part of the bill which comprises ‘social costs and green taxes’ to help disadvantaged consumers, fund energy efficiency measures and to encourage the development of renewable energy. Such levies made up around 8 per cent of the total (electricity and gas) energy bill rising to around 16 per cent of the bill by 2020. Electricity bills bear the greatest burden, as this is where renewable energy plays a role. Our research shows that electrically heated households bear more than their fair share of the burden. By 2020 ‘electric only’ consumers will represent 11 per cent of consumers. However they will bear 19 per cent of the Government’s energy policies but they will only receive 7 per cent of the benefit.
An alternative way of raising such funds would be through direct taxation, for example income tax. Removing social costs and green taxes from household bills could be funded by adding about 1 per cent to income tax. It would shift costs from bill payers to tax payers. It could shift the cost from one to many. The bill payer, and hence the person who reaps the savings, may pay for the energy costs of a whole household whilst there may be a number of taxpayers in the household who would pay more tax. However this is only one permutation, they may be someone who lives alone or in a range of other arrangements.
Not everyone pays income tax of course and the amount we pay depends, broadly, on how much we earn, it is, or it is supposed to be, ‘progressive’. So, as always, there would be winners and losers. A household with a number of taxpayers would be more likely to be worse off under such arrangements than a household with a single tax payer or no tax payers.
Is this going to happen? Probably not. I suspect that Governments will continue to look to consumer bills rather than direct taxation.
Revolution
There is another path. Cutting the amount of energy we waste would help everyone. Our report ‘Jobs, growth and warmer homes’ shows that investing money raised through existing carbon taxes in a major energy efficiency programme could Generate up to 71,000 jobs and boost GDP by 0.2 per cent3 by 2015, lift nine out of ten households out of fuel poverty, cut household energy consumption by 5.4 per cent by 2027 and overall carbon emissions by 1.1 per cent by 2027. (For more information on this topic please see: Energy Bill Revolution.)
Until we start to talk seriously about who pays for our energy policy goals, how we pay for them and who really benefits, we will be stuck in a vicious circle of rising bills, distrust and acrimony.
* Read Alistair Phillips-Davies blog that kicked-off the big energy debate here.