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

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.

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.

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.

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.