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Why fuel bills are going up - and it's not just oil that is to blame
Robert Lea24.07.08
It has already come to this. When the British Gas executive Jake "Two Jumpers" Ulrich is telling us we will need at least two layers of knitted overwear if we are to get through this winter without a secured loan to pay our household bills, we know the UK's largest gas and electricity providers are preparing to flick the switch on record domestic energy price rises. And if you believe the energy companies, you will know why you should be preparing for bills that could be nearer £2000 a year than £1000: It's the oil price, stupid.
The price of crude - firmly above $120 a barrel since the start of May and pushing wholesale gas through £1 a therm - is the single largest driver of rises expected in the coming days that could see bills up by 50% by the end of the year. But there are other factors playing a crucial role:
Liberalisation - how was it for you?
Less than a decade ago (when annual average electricity bills were around £250), Ofgem was still wielding price controls.
Deregulation in 1999 allowed unfettered competition, which brought in the giants from the Continent - E.On, npower owner RWE and EDF - to use the uniquely liberalised UK energy market as their cash cows. Since then, the number of suppliers has gone down and prices have gone up.
Under-investment, or how shareholder dividends have been more important than capital expenditure.
Several percentage points of your energy bill is made up from distribution or transmission costs - the amount we indirectly pay National Grid or the regional network operators. Their charges are currently at record levels as they upgrade power line systems or gas mains, some of which have been barely touched in half a century. What we are picking up the bill for now is the post-privatisation decade when they lined the pockets of their investors and executives.
Under-investment (part 2), or how workers' pensions were ignored.
In the price settlements of the energy distributors (the regional monopolies are the one part of the chain which remains regulated), Ofgem has admitted that part of the rising costs has been allowances for underfunded pension schemes following the decision by companies to allow deficits to widen.
Selling off the crown jewels.
One of the perennial moans of British Gas/Centrica is that despite being gifted Morecambe Bay by the nation at privatisation, it does not have enough gas to supply its 11 million customers. It therefore has to go into the open market to pay for more expensive gas. It also has to charge its customers more.
It didn't have to be like this. Not so long ago, it owned the rich reserves and potential of the explorer and producer now called BG Group, which now dwarfs Centrica by market capitalisation.
Wise fools.
We are repeatedly told our North Sea resources are dwindling. Energy bosses saw this coming and invested in the technology that allows the sea-crossing of huge cargoes of liquefied natural gas (LNG), and spent billions on the construction of new port-side terminals to receive them. Unfortunately, the LNG producers in Africa and the Far East heard that China and the US were prepared to pay way more for the cargoes and the amount of LNG landing in Britain is a fraction of that forecast.
Wise fools (part 2).
And as an extra insurance, almost £2 billion was spent building a state-of-the-art pipeline to bring in gas from our old friends in Norway. Unfortunately, our old friends have been doing what anyone might do and decided to sell their gas to Europe, where they can get a better price, rather than Britain.
The answer is blowing in the wind...
The 7000 turbines planned for the hills and coastlines of Britain are not being developed by the energy companies out of the environmental goodness of their heart. They are receiving huge subsidies, with households bearing the brunt through higher bills.
Quite how much was never certain until the Government recently admitted the construction of windmills and the like will, alone, put 37% on your bill by 2020.
...When the alternative solution could be beneath our feet.
There's a thousand years' worth of the black stuff under Britain, coal buffs will tell you. Much of its has been uneconomic but high oil and gas prices mean it could be a viable and cheaper alternative. The environmental lobby would not allow the conventional burning of coal on obvious CO2 grounds. But the technology exists for carbon capture and clean coal-firing. Unfortunately, few in the UK have bothered investing in the gear.
Punished for turning the lights off ?
Could it be that the big energy companies are charging us more because we are consuming less, and their revenues are dropping? Figures from the country's biggest supplier show gas consumption was down 5% last year and electricity fell by 3%.
We could learn from truckers.
Energy bills are going up because we put up with it. The price of diesel goes up by a couple of pence per litre, and you can't get on the motorways for lorry drivers in revolt. When supermarkets put up the price of bread, people stop buying.
Unfortunately, it is difficult to boycott electricity or gas use without getting cold.
This Labour Government is already braced for a winter of discontent on several levels.
Deaths due to fuel poverty are surely something it will not countenance.
Reader views (4)
Here's a sample of the latest views published.
If Europeans and Americans are willing to pay more for gas then why is this commodity so much less expensive than in the UK, by about 33%? Something is wrong. Could it be once again that the UK gov't is adding huge taxes etc onto the cost so something that starts cheap ends up very expensive. There is no way out for the UK. Far too much greed combined with incompetence.
- Kr, London UK
I am a capitalist and believe passionately in less state control, however, I do concede we should never have allowed private ownership of utility companies.
What I propose is radical, but we need to create a UK sovereign wealth fund, owned for and investing on behalf of the people of the UK and for this fund to buy into the utility companies and ensure best practice and prices are a feature, with profits going back into the UK Sovereign wealth fund.
I have written to the conservatives proposing this and we could even split the UK SWF into regions with Scotland and Wales and Northern Ireland all sharing from additional funds generated from the North Sea Oil revenue. I am sure hard-pressed Taxpayers would also like the opportunity to contribute with monthly investments into the fund & given tax breaks with the outcome of sharing in the proceeds of wealth generated by the fund.
The UK SWF should be given special rights to purchase 50% of all shares in the private utility companies, with no prior signal given to the markets.
People and poor people do not buy shares, but they will contribute a small amount to ensure they benefit from lower utility prices.
On water utilities, an area where I expect massive problems to emerge as the world realises to we have too many people and not enough drinking water, the UK should be leading the world in capture and distribution of rain- fall. Creating an industry where we export excess water overseas to drought- ridden areas.
- Peter B, Chelmsford, England
In your two 'wise fools' sections you say that Europeans and Americans are prepared to pay more for their energy. Seems like we don't have anything to worry about then!
- Tim, Essex
The most sensible article on UK energy in the mainstream media for some time. Good stuff, honest and not blaming the Russians or the Europeans for a change. This is a problem of the UK's making. Just like oil though, we can't confuse causation with cure. The number one cure for high energy bills: don't use so much, but without proper feedback through metering even large business users are denied those nudges towards good behaviour. The UK had low prices for a decade, but other countries learnt to conserve or go green. Now they are way ahead of us in using energy efficiently and have created opportunities in renewables that the UK missed.
- Nick G,, London
