(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON Oct 22 Britain may be reaching the limit
of voters' willingness to pay for policies needed to transform
its energy system and avert climate change.
Following the latest round of price rises announced by the
country's Big Six energy utilities, the combined cost of gas and
electricity for an average household is set to hit 1,500 pounds
per year, nearly 5 percent of average household income.
But average income is skewed by the high earnings from
employment and investments among those at the top of the income
distribution. For the typical household, on a median income
around 20-25,000 pounds per year, energy bills will swallow up
about 6-7 percent of average income.
Nearly one in six households was spending over 10 percent of
its income to maintain adequate warmth in 2011, according to the
government's own statistics, and fuel poverty has worsened since
then as bills have continued to rise.
In 2011, rent (excluding mortgages) and energy bills were
the third largest item of average household expenditure, just
behind transport and recreation, but far ahead of food,
clothing, education and healthcare, according to Britain's
Office for National Statistics.
Energy bills are forecast to continue increasing throughout
the remainder of the decade, which is likely to see rent and
utility bills become by far the single largest item of household
Britain's government points out the country's electricity
prices are about average in Europe, and it has some of the
lowest gas prices, but that is only because the country imposes
by far the lowest taxes on gas and electricity bills.
Besides, it is not the level of electricity and gas prices
that is relevant but the pace of change, and Britain's bills are
rising fast in an economic climate where average earnings have
stagnated. Households can only pay rising bills by cutting back
sharply on other areas of expenditure.
The enforced shift in established spending patterns has made
rising energy bills super-sensitive politically.
Energy and climate policy has become locked onto an
inflexible and expensive trajectory that is generating
increasing discontent among politicians and the public.
The EU's Large Combustion Plant Directive (2001) and the
carbon budgets enshrined in Britain's Climate Change Act (2008)
will significantly cut emissions, by phasing out the use of
coal-fired power plants and requiring more renewable generation,
backed up by gas and nuclear.
But they have also reduced the amount of flexibility
policymakers and utilities have in deciding how to meet the
country's energy needs and contributed to the rise in gas and
especially power prices.
The result is that Britain cannot continue using its ageing
fleet of coal-fired power plants, which are cheap to run, but
must instead rely on costlier imported gas, as well as building
expensive offshore wind farms and new nuclear power plants.
Research conducted by researchers at Cardiff University on
behalf of the UK Energy Research Centre found "a sense of
powerlessness regarding energy prices and costs" among members
of the public in its focus groups. "The market does not operate
in a way that allows them to exert consumer power (eg through
purchasing from a different supplier at a lower rate)."
Average bills have continued rising even as households have
significantly reduced the amount of gas and electricity they use
by improving their home insulation, switching to energy
efficient lighting, and turning down the thermostat, according
to consumption data published by the government's Department of
Energy and Climate Change (DECC).
The relentless rise in bills even as consumption falls has
contributed to a sense among customers and voters that bills
will carry on rising no matter what they do.
Policymakers have sought to encourage customers to save
money by switching suppliers, but the modest price reductions
available, synchronised price increases, complex tariff
structures, and historically low rates of switching for
essential services like utilities and banking, have encouraged
PRICING CLIMATE CHANGE
The major problem is that policymakers and their advisers
have never been open with the public about how expensive it will
be to shift from a dirty polluting energy system to a clean
green one. Customers and voters have been surprised and angry
when the costs have started to roll in.
Cardiff University researchers found strong support for bold
changes in the energy system in both their focus groups and a
specially commissioned national poll ("Transforming the UK
energy system" July 2013).
But support for changes, and specific measures, was often
contingent and dependent on the context in which they were
Both the poll and the focus group found high levels of
anxiety about the mounting costs of energy and whether it would
remain affordable in future.
Unfortunately, the researchers did not try to find out how
much customers and voters would be prepared to pay (in terms of
higher bills or taxation) to transition to a cleaner energy
As the research paper explained: "Costs (of various policy
options) were treated carefully due to the high levels of
uncertainty and contestation which arise out of the multiple
factors that influence calculations; such as ruling market
conditions or the commodity prices for fuels and carbon and
disagreements over aspects of calculation like discount rates."
"Additionally, there is complexity in calculating the impact
of energy system transition costs on customer bills adding a
further layer of uncertainty," the authors admitted.
Instead the researchers used a series of generalised "what
if" questions: "what if that was substantially more expensive,
would that affect your view?"
The problem is that "substantially more expensive" is a
woolly term. By shying away from putting monetary amounts on the
costs of various options, even contested ones, the researchers
missed an opportunity to test the limits of the public's
willingness to incur higher short-term costs to avert global
Respondents did not always opt for the lowest cost option,
according to the researchers. But it would still have been very
helpful to know how much more individuals were willing to pay to
avert climate change.
It is reasonable to suppose that most customers and voters
would happily pay an extra 50 pounds per year to avert the
threat of catastrophic climate change, but that support would
drop significantly if the cost was put at 500 pounds, and be
very low if the overall cost was pegged at 2-3,000 pounds per
So cost is important.
Interestingly, the focus-group research revealed some
evidence customers would prefer the costs to be met through
general taxation rather than via utility bills. But shifting the
costs from bills to taxes would not make them go away, or
necessarily make them any smaller.
Having failed to find out in advance how much customers and
voters would be prepared to transform the energy system,
politicians and the energy industry have instead embarked on a
giant real-world experiment in which bills will keep rising
until the public says "enough".
Britain has tried this sort of thing before. Since the
1990s, the government's fuel-duty escalator has pushed through
seemingly relentless annual increases in gasoline and diesel
taxes to encourage more efficient vehicles and raise revenue.
It eventually ran into severe popular resistance, manifest
in motorists' fuel protests and rising political opposition.
Many of the pre-planned price rises have been postponed or
cancelled in recent years to try to avert further rises in fuel
Now energy policy is running into the same sort of
headwinds. In effect, the government and energy industry are
testing to see how far customers and voters can be pushed before
they revolt and demand a change of strategy.
Under present policies, it is very likely bills will
continue to rise over the next 3-5 years faster than average
incomes, so the squeeze will intensify, and the political
pushback will mount.
The question is whether the government will modify its
course voluntarily, or wait until the popular revolt enforces a
change of strategy.
(Editing by William Hardy)