The less energy I use, the more I pay per unit. Sound fair?

ABSOLUTELY!

I have said this in posts to other Convo’s over the last few months and so far Which? don’t appear to have acknowledged the issue – I’m delighted that this convo has come up as it suggests that Which? are, after all, looking at this perverse system.

It did indeed include a boiler replacement, from a G rated over 30 year old back boiler, which was either on or off no thermostat controls, for a spanking new boiler, the cost of which will never pay for itself, even if we hit maximum savings figures each year, put out by the energy saving trust.
British gas informed us a month or so after fitting that they would expect gas use to remain the same as a new boiler used as much gas as an old boiler, something not mentioned in “energy saving” figures or projections.

– top whack paid for full double glazing, inc doors
– one less adult living in the house for 4 months
– removal of gas fire
– double outside rendering applied
– the latest cavity wall insulation
– an extra layer of loft insulation
– room thermostat fitted
– thermostatic radiator valves fitted (tested both using them and not)

weve had the meter replaced, pipework checked by two engineers, pressures tested, boiler tested (its only 10 months old), all british gas can advise is that we wait until next years statement comes in because they “dont know” why we have used more units of energy.
If it wasnt draining our money, it would be laughable.

I understand the logic behind what Rarrar says above, but I cannot agree: the energy companies have made monumental (some would say obscene, and I agree) profits since Thatcher deregulated them in the 80’s. They continue to make vast profits now. If the standing charge, or the ‘hidden’ equivalent, was necessary to cover the supply costs then there would be less profit made by the suppliers.

On top of that, both Osborne and recently British Gas (see post from Frugal Ways above) have told us that energy prices need to rise because we are using less. Osborne said this by way of trying to wriggle out of the fact that the 3rd quarter saw further economic poor results rather than the improvement that he and the condems have been promising since taking office and the BG MD said it by way of justifying further price hikes with the implication that profits would not be so healthy next quarter if prices stay the same and hence the economic recovery would be further stalled. If the standing charge (or equivalent) was really needed to keep the infrastructure in good order then Osborne and BG could have said so explicitly when seeking to justify price rises. Both know that the general public and the media would find such an argument more palatable than just trying to blame the economic situation on people spending less on gas and electricity so to me the fact that neither tried to use that reasons means it is not true and would have been quickly exposed as untrue had they done so.

Anyway, even if a standing charge is absolutely necessary, having a nationally set one that is agreed by Government, would be perfectly satisfactory as the supply network (national grid) is just that – national – and so there will be no variation from region to region or supply company to supply company. Before the utilities were privatised there was, if I recall correctly, a standing charge, it was the same over the whole country and the infrastructure was maintained to at least as good, if not better, standard than it is now. A national standing charge would still promote clarity in billing and fairness for all, so whether it’s needed or not, there is a better way than the current pricing structure.

I think the standing charge is different for different “regions” of the country which may pre-date privatisation .

It would be interesting to see what the profit levels for energy companies are in terms of % of turnover and how this compares with other industries.

Of course profits are a feature of a privately run industry unless the companies are set up as “not for profit” and the privatisation of the electricity and gas companies is down to the parliament “we” voted for and some would say we benefited with lower personal taxes.

Hi Chris. Making unit prices progressively more expensive has a lot of merit. However, in a competitive market where suppliers are able to offer more than one type of tariff, those consumers who would be worse off with such a tariff structure would simply switch to a tariff where they wouldn’t be penalised (a flat rate, for example). So, yes, such a tariff would have to be imposed on consumers by law to make it work at all.

Aside from removing choice of tariff from consumers, there are also some interesting practical challenges to these so-called ‘rising block’ tariffs. One argument that the blocks in the tariff should be sized according to household size to address the issue of low income-high consumption households (and, by definition, high income-low consumption households who would draw a disproportionate benefit if blocks for all households were sized equally). This information is not routinely collected or kept up-to-date (this issue is also raised in discussion of rising block tariffs for the water industry in the independent Walker Review – http://archive.defra.gov.uk/environment/quality/water/industry/walkerreview/final-report.htm) and would be difficult and costly to collect. The alternative is some form of self-certification, although this could be subject to fraud/misreporting.

So – lots of interesting questions and ones that we will certainly be considering as we take forward our work on energy.

@James,
Your points above are good, clear and make a lot of sense, but the issue of low income high use households (and the well or people in the reverse position) merits some exploration I think.

Back in the 70’s and early 80’s, when I was living and old enough to have at least a rudimentary grasp of energy pricing, and pre privatisation, we had a nationally set standing charge and a nationally set price per unit (electricity) or per therm (gas). To the best of my recollection we did not have any different schemes even for the country piles of the landed gentry.

As far as I can remember the system worked because the poor (into which category my family undoubtedly fell, at least using the very commonly used free school meals measure) were paying a realistic price that had some bearing on the actual cost fo the energy, might (I cannot remember) have been in some way linked to inflation) and certainly was NOT designed to make profits for shareholders. All but the most poverty-stricken could therefore pay their bills and, significantly, many modern energy guzzling gadgets did not exist and the “standby button” was a space-age futuristic invention that had not arrived yet.

Conversely the wealthy did not moan about paying the same as the poor, even if they were in single-person, low-user households (or if they did, they did it behind closed doors), and I attribute the lack of complaint to the fact that everyone knew that they were paying the same as everyone else, so it was a fair system.

Now, all that historical rambling IS leading somewhere: if the price of energy actually reflected the cost of generating (electricity) or extracting and piping (gas) AND if maximising profit for shareholders was NOT in the equation, then I am firmly of the opinion that we could (and indeed should) return to a single tariff, imposed by law, applicable to all users.

The only reason that this will not happen is because the shareholders in the energy companies would probably start a civil war if any government made this move. Nationalisation is a potential solution, but the shareholders would still be in uproar and in the present financial situation I doubt whether the economy could stand the strain of doing so.

IN short this means that we are almost certain to stick with an unfair system which will continue to benefit the rich (esp shareholders and heavy users) and will continue to penalise the poor and low users.

It’s just another example of how, at least for the last 30 years of not longer, the poor are robbed and the rich receive their money.

Thanks for your comment, David. We understand your disappointment, but, as you’re aware, Which? (CA, as was) campaigns on a range of important issues, and it’s only as a result of the recent priority we’ve accorded energy that we’ve had the opportunity and the resources to examine this issue in more detail. Furthermore, with its key focus on tariff complexity, Ofgem’s Retail Market Review presents an opportunity to influence the debate that was just not there even 12 months ago.

To be clear, we are not proposing that suppliers’ operating costs be included in the standing charge. We agree that these and the cost of energy should be recovered in the unit charge. However, our proposal is designed to take account of the fact that some of the costs passed to energy suppliers by the monopoly distribution businesses (ie costs over which they have not control, and, in fact, are set by the regulator) are chargeable at a per customer (rather than per unit) level, and relate generally to providing a physical connection to a network rather than to the usage of that network. The size of some of the social and environmental obligations placed on suppliers by the government is also determined by the number of customers a supplier has, as opposed to the aggregate amount of energy used by its customers (the basis for some of the other government obligations). However, it seems extremely regressive to make all households make the same contribution to the cost of meeting these obligations and we see no clear justification for structuring them in this way.

I have responded to the idea of banded tariffs where the unit price gets progressively more expensive above.

Hi Jess,

Thanks for taking the trouble to reply to my post.

I do understand your point of view about the illogicality of high initial unit and standing changes from the consumers’ perspective, particularly when we are all being encouraged to reduce energy consumption. But if we consider the economics and practicalities of electricity generation, I can’t see how it could change that much.

Nearly everyone who is connected to the grid has the potential to use over 10kW of electricity at the flick of a switch. So, even if your flat is empty most of the time, the generating companies still have to ensure there is sufficient plant and capacity to supply electricity when you are at home.

As you come in from work, you probably switch on the lights, turn them out as you go to bed, then maybe turn them on again early the following morning. Although your own usage is frugal, your demand is still on top of many other customers who all have similar patterns of consumption. The generators cannot respond instantaneously to this varying load, nor can nuclear and coal-fired plant be shut down overnight.

Hence cheaper units are offered during periods of low demand, to encourage the use of power that might otherwise just go to waste, and to help even out the daytime load on generating plant by shifting some of the demand for heating.

Then there are the seasonal peaks. Christmas day is one example; the oven, tree lights and television are switched on and millions of kettles are boiled following the Queen’s speech. Some of this generating capacity sits idle during the summer months, perhaps undergoing maintenance, but idle none the less and not earning revenue.

In summary, a standing charge, whether recovered as a fixed amount or by adding it to the cost of initial units, does seem to me to be a fair way to recover the investment made on behalf of each domestic consumer. And I would like to see the use of differential pricing and load switching increase further, as wind and solar power become a larger proportion of the mix. This will encourage us to make the best use of these renewable energy sources at the times when they are available.

I don’t wish to sound like a spokesperson for the electricity industry (I’m not) – just an applied physicist with a fair understanding of how these things work in practice. Keep fighting the consumers’ corner for lower electricity prices, but please consider how your chosen pricing model will work within a privatised industry that requires a lot of capital investment – especially to get more renewable sources online.

Em

I think that some of your analogies are false – certainly buying in bulk will/should result in a discount, but this is simply due to the delivery methods, nothing to do with the actual amount consumed. We are also urged by all and sundry to conserve energy; no-one (to use your example) is exhorting us to drink less wine (unles it’s the Temperance league!).

I have to agree with Chris (below); proper regulation and a comprehensive charging system would give fairness, especially to those currently in fuel poverty – as I pointed out earlier, necessary usage for families could be calculated and applied so that a great number removed from the huge number in fuel poverty at the moment. Single-source users could be acommodated, but this requires a will from Government, and I don’t see this at the moment.

With respect, I think your response is muddled 🙂

Buying energy in bulk is to me very similar to the other purchasing examples.
Bulk buying discounts cover a number of things – from production, delivery, storage and point-of-sale costs to cash flow involved in holding the stock.
Standard business model.
For electricity there are the fixed costs of plant, and after that the energy company (to a point) has a lower per unit cost of delivery the more you consume.

Ummm….and all sorts of people are exhorting us to drink less, from medics to the police. This is one reason that most/all drink has alchohol units on the labelling.
There is also pressure on the supermarkets to reduce the amount of cheap booze on health and public order grounds.

Most importantly, there are two seperate issues; is it a reasonable abstract business model (yes) and is it a green business model (perhaps not as much).

I have responded to Chris below as regards “fairness”.

Chris,

two responses to try and keep the issues to a manageable size 🙂

Incidentally I think the use of the term “fair” may be clouding the issue.
Also you do seem to have skipped over my four point plan at the bottom of my post above.

My main complaint about the “fair” argument was the justification:
“I essentially end up paying more per unit in comparison to a high user. To me this seems illogical

**because it acts as a disincentive by encouraging me not to be so careful with my energy consumption** ”

I say again “What?????”
The higher the unit cost of energy the less incentive there is to reduce consumption?
Can someone please explain to me the logic behind this?

Is this not like saying the higher the unit cost of petrol the less incentive there is to save fuel?

The expected behaviour if you accept this argument seems to be:
“Someone is paying less per unit than me – it isn’t fair!
Right – I’ll show them! I’m going to leave all my lights on so there !!!”.

?

Chris,

second part.

Clearly splitting the two issues of business model and green taxation and trying to avoid the use of “fair” (darn, failed comprehensively below).

Preventing the standard business model of discounting for bulk purchase in order to implement a form of ‘green taxation’ is a viable approach – charging is directly related to consumption and the more you use the more you pay, without a reduction of the pain once you go over a certain threshold. There is no ‘victimisation’ of higher energy users, just no reward.

Ramping up the rate of charging as consumption rises (ignoring any initial subsidy to help reduce fuel poverty) is not “fair” unless:

You implement the same strategy across all forms of energy consumption – electricity, gas, bottled gas, fuel oil, perhaps even solid fuel for heating and lighting.
Also, transport is an energy user and polluter.
So to be “fair” you must also charge more for motor fuel the more people use.
Oh, and you need compulsory negative air miles so that the greater distance someone flys (no, make that transport miles because ships, busses, trains all consume and pollute) the more they have to pay per journey.

So loading the green taxation onto metered domestic electricity and gas supplies is easy and straightforward to implement.
That doesn’t make it “fair”.

Note that I am not disagreeing with green taxation – I just do not agree with some of the proposed approaches amd justifications.