FIVE REASONS WHY ENERGY BILLS ARE SO HIGH – AND STILL RISING

We’re spending more and more on energy with no end in sight, regardless of what shade of green we plan for our future. Can we do anything about it? Gas prices are not easy to control, but politicians do set energy taxes and levies, and decide on how investment in low-carbon power generation, the power grid and energy efficiency is spent.

Understanding what makes up our energy bills is key to holding politicians and energy providers to account. Here are the five reasons your gas bills are high and rising.

1. HIGH GAS PRICES

“In the last 10 years, commodity prices are probably the single biggest thing that has affected energy bills in the UK,” says energy consultant Matt Brown. Most of the money households fork out for energy is spent on gas for heating, some 60%. But in the UK’s gas-driven power sector, the gas price has also become the main driver of the electricity price.

Energy bills have gone up as the UK shifted from being a net exporter to a net importer of gas in the last decade, and gas prices rose in tandem with oil prices. The two fuels are typically drilled for together and their prices remain closely linked, despite Brussels’ efforts to create more of an open market for gas.

2. GREEN LEVIES AND OTHER TAXES

That said, the relative importance of gas prices is going down. The most recent increases in electricity bills across Europe are primarily due to higher taxes and levies, including support for renewable energy, according to research from the European Commission.

Calculating just how strong a price driver this is, however, is difficult. European electricity industry association Eurelectric is working on a yet-to-be published study whose first findings show that the energy part of UK household electricity bills went down by 4% from 2008-12, not up by 6% as the commission calculates. Instead, Eurelectric attributes much more of the total increase in bills to taxes and levies. Suddenly the “big six” energy firms no longer look like the biggest problem; it could be government.

In truth the figures differ because countries do their accounting differently. The UK counts renewables subsidies towards a bill’s energy component while Spain, for example, adds it to grid costs. Note that, even with Eurelectric’s revised numbers, taxes and levies make up just 15% of a UK household electricity bill compared to nearly half in Germany. This is also due to the UK’s low VAT rate on energy – 5% compared to 20% across most of Europe. Despite the controversy, UK households pay below average bills in Europe.

And the finger is still pointing in the other direction: Ofgem has called for a full-scale competition enquiry into the energy sector because energy retailers increased their profits nearly fivefold from 2009-12 with “no clear evidence” of them becoming more cost-efficient. Are we paying them too much for our energy?

3. INVESTMENT IN THE GRID

Bills need to cover repairs, replacements and upgrades to the grid as well as low-carbon generation. Ofgem interim partner Martin Crouch does not see this as a cause of rising bills and expects network costs will be “staying flat in real terms”.

Yet further investment is needed to link up offshore wind farms and better connect the UK to the European mainland. The latter would foster competition, bolster security of supply and enable imports of cheaper power from the likes of Germany, which has a surplus of renewables and a coal-driven power market. “The UK would profit from the EU internal electricity market if it had enough interconnections,” says Katharina Grave, a consultant with Ecofys.

Importing green power from elsewhere could well be cheaper than subsidising expensive new domestic projects such as the Hinkley Point C nuclear power plant too. Once built, it is due to get more subsidies than German photovoltaic (PV) solar projects do today.

Grid-related costs make up about a fifth of the average UK household electricity bill today. Although Crouch and others expect this to hold steady because costs are spread over decades, further expenses may trickle down to consumers through energy producers who will pay for the bulk of offshore and international connections.

Most grid costs relate to hardware, such as building new cables to carry electricity, but part of it includes the cost of technology including smart meters, which will enhance efficiency and curb the rise of total costs.

4. OUR OUTDATED ENERGY MARKET

Smart meters bring with them an opportunity to consume at times of day when electricity is cheaper (“demand response”) and to produce our own electricity. Welcome to the era of the empowered consumer.

For the first time, customers will be able to select their energy provider on criteria beyond price per kilowatt hour and how green they claim to be. Technological change gives households the opportunity to demand a whole new kind of energy package. Yet consumers are held back by the way the electricity market currently operates.

“How markets are structured is not keeping up with reality and this is artificially and totally unnecessarily driving up prices,” says Jessica Strömbäck, executive director of the Smart Energy Demand Coalition. The UK’s plans for a market which will reward energy producers for their capacity to produce rather than what they actually provide risks shutting consumers out and simply providing a “£6bn subsidy for the big six”, she says.

And yet the UK has gone farther than any other European country in making “demand response” possible. Some say it needs a higher electricity price to achieve more.

5. FAILURE TO BE ENERGY EFFICIENT

The UK has some of the most inefficient housing stock in the World and the UK ranks consistently in the bottom 3 countries in Europe for people living in fuel poverty (whereby people are having to spend over 10% of their income on fuel).

The most cost effective way to make properties more efficient is to insulate them, whether that be extra loft insulation, wall insulation, draught proofing etc. Insulating your home has to be seen as the number one priority, before installing renewable energy etc. The public need to understand that energy saving measures such as insulation are an investment in their property – for example loft insulation can pay for itself within a year! More expensive measures such as External Wall Insulation will have much longer payback periods, but it offers many other benefits including stopping penetrating damp problems, reducing condensation as well as adding value to the property.

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