(John Kemp is a Reuters market analyst. The views expressed are his own)
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 expenditure.
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 cynicism.
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 presented.
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 future.
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 warming.
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 year.
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 prices.
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)