Thursday briefing: Will the government reform the system to bring down our energy bills?
Good morning. For too many people, this just doesn’t feel like breathing room. Andy Burnham entered Downing Street in July pledging to give consumers respite from the cost of living crisis. A day later he announced a VAT cut on domestic electricity from 5% to zero due later this year, saving the average household about £45 a year. But this pales against yesterday’s announcement that the energy price cap is rising another 4% from 1 October, the second jump in three months. The typical annual bill for household gas and electricity use will soon be a wallet-straining £1,723. Miatta Fahnbulleh, net zero secretary, worked valiantly during a media blitz yesterday to repeat early promises to help families out – the £2 cap on bus fares, action on free school meals – but the evidence is inarguable: British households are still paying more for power than many other European nations. For today’s First Edition, we ask: Why are Britain’s energy bills so high? And, what can be done to reduce them? But first the headlines. Five big stories World news | More than 1,000 people are missing – the majority of whom are tourists – after a catastrophic flash flood hit Nepal and Tibet, wiping out entire villages and leaving a preliminary death toll of 165, authorities said. Social media | Meta agreed to significant changes to its Instagram and Facebook apps in a settlement that ended a landmark lawsuit on Wednesday. UK news | A coroner has formally opened an inquest into the death of Jason Arday, who resigned as a professor at the University of Cambridge amid allegations of plagiarism. Environment | Levels of a toxic “forever chemical” rose to 13 times the legal limit during Thames Water pilots for a controversial multimillion pound water recycling scheme that will pump millions of litres of treated sewage into the River Thames during drought. UK politics | Andy Burnham has dropped his support for capping political donations, causing anger among activists and Labour MPs who have long campaigned for change to the way parties are funded. In depth: ‘No single lever can be pulled to bring down prices without consequence’
A typical energy bill is made up of a standing charge, a fee to keep connected to the grid, and a unit rate for the amount of gas or electricity you consume. It also includes underlying charges to maintain and operate the energy network and government-mandated levies to fund social and environmental schemes. Britain has one of the most expensive energy markets in the world, driven in no small part by how the market price for our electricity is determined. According to our “marginal pricing” system, the price paid by suppliers for wholesale electricity at any give moment is dictated by the most expensive source of generation required to meet demand there and then. In the UK, this is regularly electricity from costly gas-fired power plants. Regardless of how much cheap wind or solar power we make, this highest common denominator still sets the price. Last year, 31% of the UK’s electricity was produced from burning natural gas, but it is estimated to have set electricity prices over 90% of the time. Energy costs in the UK diverged from other European nations in around 2020, Doug Parr, chief scientist and policy director at Greenpeace tells me. That’s when Britain ended its reliance on coal in electricity production, which as recently as 2012 was responsible for 43% of UK supply. “Gas became the marginal cost setter, which meant we were much more exposed to the gas prices than other countries.” Subsequent wars in Ukraine and the Middle East have seen global gas prices soar, further hitting British bill-payers. Energy policy experts warn that, because successive governments have left our energy system to drift for years, no single lever can be pulled to bring down prices without consequence. That said, there are a number of short and longer-term reforms that current ministers should consider. *** Short term solutions Cut the levies – save £100 a year Energy bills don’t just pay for energy – over the years, additional subsidies have been quietly added, like funding the Warm Homes Discount Scheme, or paying for early renewables innovation. By 2027, these levies will add over £100 a year to the average household energy bill, according to the climate thinktank E3G. Subsidies also add over 20% to an electricity bill for most businesses. Levy reform could reduce inflation by 0.3%, according to modelling by Nesta, though government departments would have to shoulder the funding shortfall. Deal with energy debt – save up to £70 a year Households struggling to pay inflated bills costs us all. By the end of this year, individuals will owe an estimated £7bn to their suppliers. That’s not just a problem for those in arrears: the cost of managing this debt crisis is passed on to every consumer, at between £50 and £70 a year. Immediate solutions include introducing a “social tariff” to provide cheaper energy for poor households; giving suppliers the income data they need to assess who is in fuel poverty; and tasking Ofgem with reviewing supplier debt collection practices. Once the rising debt has been curbed, a more radical option would be to write off the remaining amount. Reactive pricing Suppliers could certainly make flexible tariffs, which incentivise people to use energy when it is cleanest and cheapest, available more rapidly. Octopus has a specific tariff for night storage heaters, for example, which it says can benefit the average householder by £128 per year. *** Longer term fixes Re-design the market – save up to £270 a year by 2030 The experts at E3G want to see major reform of market design, moving away from the current system where everybody picks up the highest price. “The government must put all electricity generators on to fixed price contracts,” says senior policy adviser Susie Elks, who argues this would also reverse the failures of privatisation where companies can make massive profits off electricity users as they have done during the past two energy crises. This approach is already used by 89 countries across the world and, according to the Common Wealth thinktank, would lower bills by an estimated £130 to £270 per household by 2030. Control the crown The crown estate makes vast quantities of cash from our energy market, as the legal owner of the seabed around England, Wales and Northern Ireland. Wind developers paid £875m to the crown in “option fees” last year. Greenpeace has threatened to sue King Charles’s property management company, accusing it of exploiting its monopoly ownership of the ocean floor and ultimately driving up the price of our future energy bills. At this critical juncture when the government plans to quadruple offshore wind power capacity by the end of the decade, Parr says the crown estate’s auctioning of seabed rights have driven up costs for developers. “Like the energy market, it’s the top-most bid that sets the price, so everybody will be paying for these highly inflationary leases.” With the crown estate the only company who can lease the seabed, Greenpeace argues “they should be looking after the public interest and maximising the cost-effective rollout of offshore wind for decarbonisation, not maximising their own profits.” Decoupling gas and electricity pricing – save £65 a year Ecotricity founder and Labour donor Dale Vince has long advocated for the permanent decoupling of gas and electricity prices. Ed Miliband was known to be considering this when he was energy secretary, telling Labour MPs it was “complicated but possible”. This is “probably the biggest and most effective intervention one can make”, argues Parr. Common Wealth suggests that households could save nearly £200 a year if the government stepped into the market to act as the sole buyer of electricity. Their research found that public procurement of electricity could shave billions of pounds from electricity prices. Other research commissioned by Greenpeace argues that even removing gas plants from the wholesale electricity market and placing them into a strategic reserve could save the average household £65 a year. This would require the government to bring gas-fired power stations under government control, meaning they would no longer be able to sell power on the open market. Instead, we’d have a state-operated strategic electricity reserve, ready to fire up if required to meet demand. This would make these power stations a regulated asset base – a process less expensive than complete nationalisation. *** A controversial curveball There’s also zonal pricing, which the UK government’s energy department rejected proposals for last year. This would have seen different parts of the UK charged different rates for their electricity, based on local supply and demand. The debate remains a bruising one, with advocates like Greg Jackson, founder of Octopus Energy, arguing it would make the market more efficient. Critics, including some of Britain’s biggest renewable energy companies, are convinced the disruption would raise costs and jeopardise plans for the UK to have a virtually carbon-free power sector by the end of the decade. A report for the UK Energy Research Centre warned that implementing zonal pricing right now risked “putting the cart before the horse.” Fahnbulleh promised yesterday that the government was exploring “what more we can do” to help those struggling with high bills. Policy analysts would argue that solutions are ready and waiting. Have your say We’d like to hear your thoughts about the newsletter – what you enjoy, what we could do better, subjects you’d like to read more of – so we’ve created a short survey. It should take around five minutes to fill out, and your feedback will help us shape First Edition for the future. Take the survey here What else we’ve been enjoying
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The Upside A bit of good news to remind you that the world’s not all bad
Sophie Jones used to feel like her fear of rejection was holding her back. So she decided to do something extreme about it: she would actively seek out that which she once hid from, and for 30 days intentionally put herself in situations where she expected to be met with a blunt “no”. Yet whether it was asking her local barista if she could make her own coffee, or approaching strangers and requesting to join in with what they were doing, Sophie’s experiment didn’t go anything like the way she imagined. “Time after time, I was exposed not to rejection, but the heartening kindness of humans who owed me nothing,” she says. “Instead of simply learning to cope with humiliation, I instead discovered rejection to be relatively rare.” Sign up here for a weekly roundup of The Upside, sent to you every Sunday Bored at work? And finally, the Guardian’s puzzles are here to keep you entertained throughout the day. Until tomorrow. Martin Belam’s Thursday news quiz Quick crossword Cryptic crossword Wordiply
