(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON Dec 2 Imitation is the sincerest form of
flattery. So the package of measures designed to cut average
British household gas and electricity bills by around 50 pounds
($82) a year, outlined by Conservative and Liberal Democrat
ministers on Sunday, is a compliment to the opposition Labour
Labour had successfully made the rapidly escalating price of
energy a central political issue, part of its focus on the "cost
of living crisis", and drawn a clear distinction between its
policies, which would halt price rises for 20 months after the
next general election, and those of the ruling Conservative and
Liberal Democrat parties.
Ministers have responded by shifting from utility bills to
general taxation some of the costs of providing subsidised
electricity to older and poorer customers, and slowing down
remedial work on badly insulated homes that utilities are
required to pay for, in exchange for a commitment that the
utility companies will pass the savings through to their
The government hopes these and other measures will hold fuel
bills down long enough to neutralise the issue at the next
parliamentary election, due in May 2015.
UNNECESSARILY COMPLICATED AND COSTLY
Britain has a bewildering array of policies designed to cut
greenhouse emissions by increasing the amount of renewable
generation, support nuclear power, raise the cost of energy and
insulate old and energy inefficient dwellings, while limiting
the impact on vulnerable groups such as the elderly and low
Current government interventions include: the carbon price
floor (CPF), climate change levy (CCL), climate change agreement
(CCA), carbon reduction commitment (CRC), emission performance
standards (EPS), feed-in tariffs (FITs), contracts for
difference (CfD), carbon emissions reduction target (CERT),
community energy saving programme (CESP), energy company
obligation (ECO), warm home discount (WHD), winter fuel payment
(WFP), cold weather payment (CWP) and the Green Deal - to name
only some of them.
The full list of interventions is explained in a handy
report on "Energy use policies and carbon pricing in the UK,"
published by the Institute for Fiscal Studies (IFS) earlier this
However, it is not clear if anyone - including ministers,
officials and the energy companies - actually understands this
complicated alphabet soup and how the policies interact with one
In addition, the government subsidises bills for all
customers by levying value-added tax (VAT) at a special reduced
rate of just 5 percent on domestic gas and electricity bills
rather than the standard rate of 20 percent imposed on other
The VAT subsidy is worth over 5 billion pounds a year,
according to the IFS. But many other policies are paid for
through customer bills rather than from tax revenues.
For politicians, paying for energy and climate change
policies through additions to customer bills has the great merit
that it does not appear in the budget and can help disguise the
It also respects the user pays or polluter pays principle:
those who use most energy and contribute most to greenhouse
emissions should bear the heaviest burden remedying the problem.
But it is also strongly regressive. Households in the lowest
part of the income distribution spend the highest share of their
incomes on gas and electricity.
Households in the bottom 10 percent of the income
distribution spend as much as 15.8 percent of their total
expenditure (excluding mortgage payments and rent) on power and
gas, compared with just 3.3 percent for households in the top 10
percent of the income distribution, according to IFS.
In fact the share of household expenditure on gas and
electricity bills declines steadily as household income
increases. The richest households spend far more on energy in
absolute terms (they have larger homes and more energy-consuming
appliances). But they spend far less on fuel bills as a share of
total spending and income.
It would be much more progressive to fund energy and climate
policies from general taxation.
PLAYING POLITICS WITH YOUR ENERGY BILL
"A five percent rise in energy prices ... would increase
living costs for those in the poorest spending decile by 0.8
percent on average, but less than 0.2 percent in the richest
decile," IFS wrote in another study on "Household energy use in
Britain: a distributional analysis" also published in 2013.
"Policies that increase energy prices ... place a greater
burden upon poorer households," IFS found. "This, combined with
concerns over carbon emissions, has led to a complicated
multitude of policies, with multiple (and sometimes conflicting)
objectives, resulting in rather opaque distributional
A blunter interpretation is that British governments have
been gerrymandering utility bills, using them to fund pet
climate policies and energy efficiency projects, while
attempting to shield selected groups of voters from some of the
Under Labour administrations, interventions have tended to
favour those on low incomes. Under Conservative-led governments,
interventions have tended to favour the old. In both cases, the
pattern of interventions has pandered to the parties' core
Unfortunately for the government, the gerrymander has broken
down over the last 12 months, as the costs of all these
interventions have risen faster than the various discounts can
protect politically important groups of swing voters, especially
in the middle of the income distribution and in the electoral
battleground of the English Midlands.
In its reports on energy use and income distribution, IFS
recommended many of these complicated schemes should be axed and
VAT imposed at the standard rate on gas and electricity bills.
"The current structure of policy is unnecessarily complicated
and costly," according to the institute.
The net result would be regressive. But according to IFS:
"it is possible to compensate (and indeed overcompensate) poorer
households on average through a targeted set of increases in
However, that would be not be politically expedient.
Instead, ministers intend to redraw the gerrymander yet again by
shifting some of the costs from bills (where they are highly
visible) to taxes (where they are far less noticeable), and
deferring some of the more expensive measures by a couple of
years, all under the heading of "government action to help
hardworking people with energy bills."
($1 = 0.6105 British pounds)