Raising the power politics stakes

9 Dec 13
Steven Devlin

Ed Miliband has reignited the energy debate with a simple idea. But a price freeze doesn’t tackle fundamental issues about energy efficiency and environmental goals

At this year’s Labour Party Conference, Ed Miliband reignited a debate on energy policy. The subsequent political grandstanding and public interrogation of the energy companies is a drama that is continuing to engage the public through every theatrical twist and rhetorical turn.

After all, energy policy is an emotive subject. We are alarmed that some people may be unable to heat their homes this winter and will suffer, perhaps even die, as a consequence; many suspect injustice is being perpetrated by anti-competitive energy companies; and, to top it off, our future environmental prosperity hangs in the balance – we have to start conserving and decarbonising energy.

Clearly, these intertwined objectives are all vitally important. But an incredibly opaque yet compelling debate has emerged in which issues of poverty, corporate malpractice and environmental stewardship are competing for the hearts and minds of the public and the attention of politicians. Throughout the confusion, one issue has eclipsed the others: the cost of energy to consumers. However, a quick comparison of domestic energy prices per unit across European countries reveals that UK prices are, if anything, rather low. The critical problem is that the UK’s building stock is exceptionally energy-inefficient and wastes a lot of energy. In other words, prices may be low, but our bills are higher than they could be – bad news for household budgets, businesses and public services. It’s also bad news for the environment.

So what to do about it? The responses of our political parties have been notably divergent. Labour sticks resolutely to the policy proposal that sparked the uproar: to impose a price freeze on energy companies for 20 months from the 2015 general election. This was a useful kick-starter for the debate but doesn’t really tackle any fundamental problems. While the policy is understandably popular, to have any meaningful impact it would need to be accompanied by sensible longer-term reforms that ensure a minimum level of energy for all without sacrificing environmental goals (and preferably, furthering them).

In what was widely perceived as a panicked response to the Opposition’s popular proposal, the Conservatives trumpeted a rollback of energy bill levies. This was promptly, and thankfully, rebranded as a review of energy bill levies and received vociferous support from energy company bosses. Some energy companies have gone as far as explicitly tying their price increases this winter to the outcome of this review.

The Liberal Democrats have defended the need for investment in energy efficiency and renewable energy, with criticisms of the Tories’ apparent abandonment of their ‘greenest government ever’ commitment emanating from senior LibDem figures.

The upshot of all the drama? At the time of writing, the government is under pressure to absolve energy companies of their responsibility for making certain environmental and social investments, and find the money from general taxation. Depending on the investments switched over, this could lower average consumer bills by up to £75 a year, but would be controversial – particularly given recent criticisms from the Local Government Association about energy companies failing to carry out green measures for which they have been paid.

The principal appeal of the reform would, of course, be social. Charges on energy bills are considered regressive: the bottom 10% of households allocate 16% of expenditure to energy, while the top 10% allocate only about 2%.  General taxation, on the other hand, is considered progressive overall as richer households pay proportionately more. But, as with all knee-jerk reactions, the potential for unintended consequences is high.

Reducing the price of energy inevitably increases energy demand and associated carbon emissions. Under this proposal, energy would become cheaper for everyone, including those who can already afford more than enough and who would, therefore, be more likely to use it wastefully. As such it is no surprise that energy bosses declared unanimous support for a move to general taxation funding at the recent parliamentary select committee hearing: they expect it will boost demand for their product.

There could be better, and as yet unconsidered, ideas for how we can balance the social and environmental aims of our energy policy. We can and should pursue social justice; but we must do so in a way that incentivises energy conservation and minimises opportunities for special interests, in government or industry, to bend the system to their advantage.

For example, the Institute for Fiscal Studies has recently proposed that domestic energy prices could be uniformly increased (by reimposing the standard rate of VAT, 20%, on energy) while providing a compensation package to poorer households that is independent of energy use and more than offsets the increase in their energy bills.

Politicians need to stop grandstanding and ensure that the policy framework does what we want it to do over the long term – that is, expedite the transition to a low-carbon energy system, while providing everyone with sufficient energy to have a decent standard of life. Overly reactive and piecemeal policymaking is not the way forward.

Stephen Devlin is an environment economist at the New Economics Foundation

This opinion piece was first published in the December edition of Public Finance magazine

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