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Your view: what’s your energy bill paying for?

Men with bulb heads

We asked whether you knew what made up your energy bills. The discussion launched a debate about renewable energy, supplier profits and confusing bills. Here’s a selection of your comments.

In his Conversation, our energy campaigner Josh Green asked whether you knew how much of your energy bills were due to weaning the UK off of carbon-intensive electricity.

We think energy companies should provide a detailed breakdown of what we’re paying for on our bills. Commenter EB agrees:

‘The subsidies to renewable energy generation should be explicitly identified on our energy bills. To do otherwise is dishonest.’

Vince P has no idea how much subsidies for green energy are adding to his bills:

‘There have been various references to the increase in our bills caused by subsidies for ‘green’ generation, but I still don’t know how much I’m paying for this, and what is the basis of calculation. I use electricity and heating oil (no gas in my village). Are these both subject to these additional environmental charges? These charges should be separate “line items” on bills – by agreement with the suppliers or by statute if they won’t provide this information voluntarily.’

Where do our energy payments go?

Malcolm R would also like to see more transparency from energy companies and government:

‘Ofgem publish an energy bill breakdown for an average consumer under six categories – between 58% and 67% being for fuel (Dec 2012) and 6-11% for environmental charges. I believe it would be useful if these categories were shown as £s on each consumer’s bill so you could see how your supplier uses its income.

‘The green energy component comes from government commitments and it is questionable how this is best paid for. As it, in principle, benefits everyone then it might be best if it came out of general taxation. However, since this would increase taxes – how popular would that be? – this is avoided by tacking it onto energy bills. Should we all pay in proportion to our bill – domestic, commercial and industrial users alike?

‘This green component is set to increase substantially. I would like to see how the government is investing this money. I am concerned about poor sources of renewable energy being heavily subsidised – on-shore wind farms, solar power, feed in tariffs.’

Energy company profits and price rises

The debate then turned to energy company profit announcements, with British Gas and EDF in the news last week. Richard Hart had some harsh words for the energy regulator Ofgem:

‘I’m a British Gas customer and am annoyed that yet again these utility companies are making huge profits yet still increasing bills. I think Ofgem should again look at the profits these companies are making and put a ceiling on how much our bills should increase. The higher their profits the least our bills should rise, but as we all know Ofgem is spineless and won’t do anything.’

Richard Scott comments on Centrica’s announcements last week:

‘The big news today is that Centrica (British Gas owner) made a 9% increase in its six-monthly profit this year, but they still do not rule out price increases this winter!

‘Ofgem needs to get a grip on these companies, who are pushing their luck – just like the banks – they don`t get it. There must be some way of curbing these excessive profits.’

We want the government and Ofgem to do more to rebuild trust in suppliers and to keep prices in check. We also want to see the government introduce simple pricing and ring-fence energy supply from generation businesses, so that you can see exactly what you’re paying for and be more confident that there is effective competition in the energy market.

Do you think energy companies could be more transparent about what it is we’re paying them for? What do you think about the latest profit announcements?

Paul Hunt says:
6 August 2013

“We want the government and Ofgem to do more to rebuild trust in suppliers…”

If this is what Which? is about, it’s as must a waste of space as Consumer Futures (which, at least, has some statutory underpinning).

You need to look at the share prices of the EU’s major players (four of whom have subsidiaries in Britain):

Similarly to the big British and EU banks, most have taken a battering over the last 5 years from both external factors and national policy decisions. They, again like the banks, have inviegled themselves in to a position of being ‘too big to fail’ (TBTF) and they’re repairing their balance sheets at the expense of final consumers. (Even though Centrica and SSE are ‘independent’ they fell foul of the policies of successive Labour governments to keep prices low and they hollowed out and leveraged their balance sheets to avoid a repeat of the Gordon Brown ‘windfall’ raid of 1997.)

Faced with a requirement to meet climate change objectives and the failure of the British energy market model to provide timely and efficient investment in electricity generation capacity, the Government is pursuing policies unilaterally that are futile, counter-productive and excessively costly. This is a European problem and may be addressed only by co-operation at the EU level. A new DG COMP energy sector inquiry is required that will lead to fundamental structural changes; it is totally futile looking for a ‘review’ of the structure of Britain’s energy industry. The EU ETS must be fixed and the trade deal with the US must be agreed to speed up delivery of US LNG exports to the EU.

But the Government is totally incapable of engaging effectively with its EU partners (even if many central, northern and eastern member-states are reaching out to Britain.) It fears it would drive its core support in to the arms of UKIP and close off Tory party funding from the energy industry and the renewable energy subsidy junkies.

So we’re left with the usual dysfunctional and excessively costly muddling through.

Paul, can you please explain the meaning of ” DG COMP,ETS , and LNG” . Thanks.

Paul Hunt says:
6 August 2013

Dave, my apologies. I’, m too close to these trees and expect everyone else in the wood can see them. DG COMP is the Directorate-General for Competition in the European Commission. It is an extremely powerful body dealing with competition issues covered by the EU treaties. It has very strong powers to investigate companies which may be in breach of EU competition rules, to make findings, to enforce remedies and to levy fines (for example, up to 10% of a company’s global revenues). It is far more powerful and effective than the UK’s Competition Commission or Office of Fair Trading (which the Government is proposing to combine in a Competition and Markets Authority).

Much of national energy and climate change policy is governed by EU Directives to which all member-states have given their consent either unanimously or under Qualified Majority Voting. (Many national governments, and the UK Government is particularly adept at this, often convey the impression to their voters that certain policies are being forced on them by the EU’s institutions as if they never had participated in the process of negotiating and agreeing these policies in the first instance.

Over the last 6 years that there been a sustained effort by the EU’s institutions to increase the integration of the EU’s electricity and gas markets. To a considerable extent this began with an energy sector inquiry conducted by DG COMP in 2007. Following this inquiry a package of EU directives and regulations for electricity and gas was enacted in 2009. These have been transposed in to national law in most, but not all, member-states. Previously and, to an extent, in parallel directives were enacted establishing the EU Emissions Trading System (EU ETS) and setting 20:20:20 targets for 2020 – 20% of renewable energy in energy supply, a 20% reduction on 2005 CO2 emissions over 2005 levels and a 20% increase in energy efficiency. However, the market power being exercised and abused by the big energy companies and their efforts to repair balance sheets damaged by their own actions, the recession and some policy interventions mean that the increasingly integrated markets are functioning efficiently and final consumers are being penalised. A new DG COMP energy sector inquiry is required.

The EU ETS is an EU cap-and-trade mechanism where CO2 emission allowances (EUAs) were awarded to large industry and electricity generators participating up to a limit which would then be cut progressively. The generators and industrial firms could trade these EUAs to generate a price. The higher the price the more incetive the market participants had to generate or using low or zero carbon energy. Over time the EUAs would be auctioned rather than given away. However, the recession intervened and energy consumption fell leaving the participants with bundles of unused EUAs. Not surprisingly the EUA price collapsed. A couple of attempts have been made at the EU level to fix the EU ETS so that it will generate an EUA price to allow the participants to contribute to the achievement of the EU’s 20:20:20 objectives. But the latest attempt is really a bit of ineffectual sticking plaster. A much more concerted effort is required.

LNG is liquefied natural gas. When natural gas is cooled down to around 160 C it becomes liquid and can be transported in ships, regasified and injected in to gas transmission systems. The shale gas boom in the US has oversupplied the market, driven down the price and many producers are bleeding red ink. They desperately want to export this surplus gas in the form of LNG, but the Obama administration is fearful of the impact on domestic – which will have to rise in any event. Wholesale gas prices in the EU are three times those in the US and LNG exports could begin to help to close this gap.

So, there’s a lot national governments and the EU’s institutions could do to reduce the costs of electricity and gas to final consumers and to reduce CO2 emissions rapidly and efficiently. But they would much rather pander to influential vested interests and pressure groups and impose excessive costs on the majority of citizens as energy consumers and taxpayers.

Paul Hunt says:
9 August 2013

Oh dear. It seems I’ve killed this conversation stone dead. It probably doesn’t matter. Despite publishing two well-researched reports which highlight the dysfunctionality of Britain’s wholesale and retail markets in electricity and gas, Which? does not seem to be interested in mounting a concerted campaign to demand the necessary remedies in the interests of all consumers.

But, even if it did, it probably would make no difference. The Government has embarked on a two-year re-election campaign and in this area is focused on getting its energy bill enacted, putting it to bed and managing the inevitably messy outcomes to minimise damage to its re-election prospects.

Because it is tackling symptoms and not seeking to remedy the underlying malaise in the British (and EU) markets for electricity, gas and carbon, unintended consequences will abound, energy bills will increase, there will be panicky efforts (but ideally after the next election) to ensure a sufficient electricity generation margin when large plants go off-line and the rent-seekers will make out like bandits at the expense of all citizens as consumers and taxpayers.

All perfectly predictable – and all avoidable. But who cares when there is an establishment collusion to ignore it – and consumers can be relied on to pick up the tab?

Paul, you appear to have extensive knowledge of the energy market. I would be interested to know whether or not you agree that moving to unit pricing for energy, as is done for petrol or diesel, would be a good thing for the great majority of consumers.

Paul Hunt says:
9 August 2013

Hi, Dave. The simple answer is no. Petrol and diesel are commodities, measured on a volumetric basis that, in most instances, serve a single purpose – fuelling an engine for a period of time. Electricity and gas are commodities at the wholesale level, but for the majority of households and small businesses at the retail level they provide a utility service. People demand this service to match the way they live and, from an efficiency perspective, whatever about a social equity perspective, it would make sense to price the service accordingly.

In the mid-90’s, Michael Heseltine, then President of the Board of Trade (or PotBoT), decided that full retail competition in electricity and gas would be rolled-out beginning in 1998. It was a stupid decision, but there is no going back. It would have been far better to have local or regional franchised suppliers, subject to effective regulation, competing and trading in wholesale markets with generators and suppliers on the other side. Over time as the depth and liquidity of these wholesale markets increased, the roll-out of retail competition could be considered – as it has been progressed, carefully, in many US states.

Instead, in Britain, and entirely predictably, we ended up with a number of big vertically integrated players dominating the market – the Big 6. The EU made the same mistake in 2003 and decided to roll-out full retail competition from 1 July 2007. The EU market is now dominated by about a dozen players with the EU Big 7 (four of whom have subsidiaries among the UK’s Big 6) lording it over all. The article to which I linked above gives some reasons why a single price isn’t very clever in such a market – and might even lead to higher prices.

Now we are facing the prospect of the roll-out of smart meters. In theory this should allow the retailers to sell customised energy service packages to individual consumers so, in theory, there could be an energy service price for every consumer. I doubt it will go that far, but the increasing use of smart meters over time suggests that campaigning for a single energy price doesn’t make a lot of sense.

There are far more important issues to be addressed to achieve energy market competitiveness, sustainability and security of supply – and which would benefit consumers and the economy. Pursuing what seems like a simple popular idea suggests a lack of understanding of the economics of the energy markets and of imminent developments in these markets.


There has been heated opposition to smart meters on other Conversations. The least controversial reason is that introducing them will cost a fortune. I have no objection to anyone buying their own smart meter, though they should be make aware that it might not be useful if they change electricity supplier. I don’t object to them receiving an appropriate discount on their bills for not needing periodic visits to read the meter.

Paul Hunt says:
10 August 2013

The implications of smart meters are frightening. On one hand, yes, consumers should be able to use ‘time-of-use’ pricing to shift their loads and reduce their bills, but, on the other, the energy suppliers will have real-time information on consumer’s consumption behaviour. If anyone thinks they won’t abuse this knowledge that is equal to power then they need their heads examined.

Which? has focused in its market reports on the ‘imbalance of power’, but has failed to follow through. And, going back to the question of what energy bills are paying for the answer is simple.

They are paying, and will be paying, to boost/repair the balance sheets of the greedy and occasionally unfortunate big energy companies, to fund the renewable energy subsidy junkies and to pay excessively for the hare-brained interventions of this government seeking, in panic mode, to repair the damage caused by serious policy and regulatory failures of this and previous governments.

There will be no possibility of relief for consumers until we begin to tackle honestly the underlying problems.

Paul Hunt says:
16 August 2013

Hi, Patrick,

I don’t think Richard Lloyd’s statement registered on the media radar. But it gets to the heart of the matter. Final consumers and service-users are being taxed so as to generate extra revenue up-front to remedy previous and on-going policy, regulatory and corporate failures. But it is an implicit hidden tax. Governing politicians, policy-makers, regulators and the big energy companies will simply deny that it is being levied and that, in any event, additional costs will have to be incurred to alter the pattern of energy production and consumption so as to achieve long-term sustainability and security of supply. DECC’s continuous refrain, based on very suspect projections of future wholesale energy prices, is that final prices would be even higher in the future if the Government were not to pursue its current policies.

Final consumers in Britain are trapped by the structure and ownership of the electricity and gas industries. The current oligopolistic, vertically integrated supply structure with network monopolies was entirely predictable and inevitable. Such a structure would always act against the interests of final consumers, but, in the current situation, it is immeasurably worse, since the big companies are building up and repairing balance sheets that had been hollowed out previously or helping to repair recession and policy-related damage to their parents’ balance sheets. And they are attempting to do in the context of a step change in investment required.

None of them are willing or able to inject new equity. Their borrowing capability is constrained. So the only recourse is to extract up-front, part-financing of investment from final consumers via higher prices. It is damning evidence of the total failure of the British privatised model of energy competition and regulation. But British final consumers are totally trapped unless they can mount collective action to protect their interests. There is little prospect of this.

In contrast, many final consumers, for example, in Germany, though they are paying much higher final prices, are fighting back against the big energy companies by participating in local and municipal supply of energy. It is clear that many perceive the benefits out-weigh the costs in terms of higher prices. The decentralised structure of democratic governance in Germany facilitates this and the approach is spreading in to neighbouring countries.

Britain’s excessively centralised structure of democratic governance prevents this happening here. And, ironically, the more successful German and other continental consumers are in developing local, decentralised energy supply that displaces centralised supply by the big energy companies and reduces their profits, the more their subsidiaries in Britain will gouge final consumers here to repair their parents’ balance sheets.

The situation is even worse in the water and waste water industry with so many companies with hollowed-out balance sheets being taken in to private ownership. Thames Water’s demand for an up-front payment from service-users to part-finance investment is just the most recent example of the dysfunction.

The Government is trying to solve all the problems unilaterally with a plethora of costly and ill-thought through initiatives. A number of the problems may be resolved only via enhanced co-operation with Britain’s partners at an EU level. These relate to the malfunctioning EU ETS, the malfunctioning EU gas market and the structure of the dominant oligopolistic, vertically integrated energy suppliers.

At the national level, government will have to legislate on the financial structure of the utility supply and infrastructure businesses to ensure that investment financing is generated from a mix or retained earnings, borrowings and new equity – and not extracted up-front, as an implicit tax, from final consumers. As a quid pro quo it may have to develop and apply an investment recovery guarantee fund.

But the Government has already kicked off its re-election campaign, so nothing will happen expect more gouging of final consumers. The Labour party was so complicit in the policy, regulatory and corporate failures that are now manifesting themselves that it now has nothing useful to contribute. Which? is the only organisation that appears to be taking these issues seriously, but it has no political traction.

It appears that all final consumers of utility services are fated to be exploited mercilessly.

Ah, so that is why I had a recent gas bill for £25, £22 of which was the standing charge. I used very little gas in the past three months as I have been rarely at home. This bill is the equivalent of being charged to use petrol when your car is in the garage. That is why a standing charge is unfair to low users.

Nobody is forcing anyone to have a mains gas supply or pay a standing charge.

If you only want to pay for the fuel you use, try coal, wood or LPG. It’s not unfair, just common sense to use the appropriate fuel for your circumstances.

Thanks for the suggestion.