Energy Market Reform

This week’s news has been full of hot air about energy prices.

The Chief Executive of Npower suggested that consumers should use less energy if they want lower bills. Actually, that’s very sound advice, but it came on the back of the recent energy price hike and so of course the media and politicians have been up in arms over this ‘affront to the public’.

Shadow Energy Secretary Caroline Flint said that energy companies shouldn’t lecture customers when thousands are struggling with bills and Labour Leader Ed Milliband said that this was more evidence of ‘a broken market’ and reiterated his call for an energy price freeze.

Meanwhile the energy companies are desperately dissembling; trying to blame Government subsidies and levies for the price hike, when in reality these represent a very small percentage of bills. Maybe that’s what led to the spat between Deputy Prime Minister Nick Clegg and Prime Minister David Cameron over green taxes.

I guess that politicians and energy companies alike don’t want the public to know just yet that we are on the fast track to ever more expensive fossil fuel (see my oil price infographic) that will likely make the strike price for nuclear electricity agreed this week look like a bargain in 2023.

There is of course one simple measure that could be taken right now:

Instead of the cost of energy reducing as you use more, it should more expensive.

Imagine if the first 1000kWh or so of energy you used each year were free of charge. That would equate more or less to the winter heating allowance paid to pensioners, but would benefit all vulnerable households reducing fuel poverty across the board. Then the next 1000kWh would be charged to cover the cost of production, the next 1000kWh would cost more and so on. We could pitch it so that by the time you get to the UK average consumption the overall bill remains the same as it is now. Then the cost could increase rapidly with further consumption, allowing the energy companies to make their profits at the expense of profligate consumers.

At a stroke you’d address fuel poverty, rebalance the energy market, encourage energy efficiency and penalise the wasteful. This would re-balance the energy market in exactly the way that the politicians keep saying that they want to achieve.

So why are they not doing it? This is, after all, the way in which road duty is applied to cars – the more polluting the higher the charge, and council tax is applied to housing – the larger the home the higher the charge. Unfortunately our political parties of all shades are now firmly capitalist and rebalancing the market through taxation would be anti-capitalist.

The market will not deliver such change either, since no single company dare move to a new pricing system in isolation and concerted action by all the energy companies would be classed as collusion and anti-competitive!

It is not simply the energy market that is broken, it is our political-economic system.

8 thoughts on “Energy Market Reform

  1. Its interesting how all the political parties were so alarmed at the prospect of Grangemouth refinery closing with its implications for uk fuel distribution. I wonder if when the UK energy supplies are entirely run and financed by Chinese, French or other non-uk companies, whose modus operandi is profit over energy security, will people start lamenting the loss of nationalised energy – where the type of reverse taxation you refer to Doug is possible.

  2. Neat idea. Better than Major’s windfall tax certainly. Would need to work out how it applied to those who pay by meter. And those who move or switch suppliers. There’d soon be some exploiting any loophole to get a free 1000kWh over and over again. But that’s detail – the principle is great.
    I’m not clear if you intend this for households only or for business users too. If the latter then it’d be a wee gift for small businesses and a mild disincentive to expand but that’s a minor drawback. How big a hit would it be for heavy users like steel and chemicals – would the gradient level out at a certain usage?

  3. WOW of course Tony you make it sound so simple it’s either the Tory boys, Labour or Lib Dems to blame. Not that that they have to deal with eduction, health, unemployment, crime, poverty etc etc. So they can’t get their acts together on energy. Really not a big deal. I’m with the ‘statement’ from CE of NPower “use less – pay less” turn the heating down put a jumper on !! FGS you live in a country that has heating and electricity freely available stop whinging about prices, get out and see what poverty in other countries looks like. As for market system or state controlled views try visiting most ex-USSR countries and get their views. From personal experience most value their liberty over any lowering of state sponsored living standards. If you think our politic-econmic system is broken get of your ass and run for local council / MP and do something about it. The Uk problem is we all moan about our own personal issues but less than 40% actually bother to vote. You want to change the world, stand up and be counted, start a revolution…… otherwise pay the bills and stay warm !

    • Thanks for reading Andrew.
      I find when commenting on blogs, in the media or in Parliament, that it often helps to know who you are directing your comments at. A little research goes a long way. I do hope that you take a little more of a measured approach to your dispute resolution business.

  4. Great stuff. I’ve been pondering this over the last couple of weeks too. The other problem that any unilaterally acting company would have, is that low-consumption customers would flock to them, yielding little profit, and the higher users would stay away, so as you imply, it could only work if a major reform was on the cards. Despite the noise from parliament I don’t think they’re really got the backbone to do what is required.

    • Toby – The answer is obvious in any economic system other than capitalism. Whether the fulfilment of human needs (basic energy, water, healthcare and education) should be subject to a market system or state controlled is of course a whole other debate.

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