(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON, Sept 27 (Reuters) - With his promise to freeze utility bills if his party wins the next parliamentary election, Labour leader Ed Miliband has lobbed a metaphorical grenade into the heart of the country’s delicate political consensus on energy and climate change.
Despite fierce disagreements over some details, such as the siting of wind farms and how to finance new nuclear power stations, there is a high degree of consensus among Britain’s three big political parties, at least at leadership level, as well as business groups and environmental campaigners over the broad outlines of energy and climate policy.
The only groups not part of this consensus are utility-bill payers and voters. Surveys show the public is more worried about the affordability of energy than the risk of climate change.
By trying to turn those concerns into electoral advantage by putting the rising cost of gas and electricity at the centre of the political debate, Miliband risks shattering the consensus that has been gradually transforming Britain’s energy system, making it substantially cleaner and greener.
The Climate Change Act 2008, which sets binding targets for reducing emissions of greenhouse gases, is the centrepiece of Britain’s energy and climate policy.
Piloted through parliament when Miliband was responsible for energy and climate policy in a Labour government, the act has been embraced by his successors in the ruling Conservative and Liberal Democrat coalition elected in 2010.
Emissions reduction now underpins every aspect of UK energy strategy. The principal elements are a reduction in wasteful energy consumption, gradual electrification of the energy system, and the replacement of fossil fuels, especially coal, in power generation with cleaner alternatives like wind and solar.
Delivering a more efficient and lower-carbon energy system is enormously expensive. But there has been a consensus that the costs will be met through increases in utility bills rather than general taxation.
Politicians from all three main parties find the strategy attractive because it allows them to claim they are doing something to avert global warming. Big business likes the profit opportunities associated with major capital investment, especially since returns are guaranteed in many cases. And environmental groups like the emissions reductions.
Energy and climate strategy has therefore been largely taken out of the political and policy debate. But it is about to re-enter with a vengeance.
The strategy’s weak link has always been the resulting rise in customer bills. Increasing prices for gas and electricity are an important mechanism for persuading homeowners and businesses to use energy more efficiently. But they were always going to test bill payers’ patience eventually.
For the decade between 2002 and 2012, the worldwide rise in oil and gas prices helped quell concerns about the rise in utility bills. Politicians stressed the risk of oil and gas supplies running out, prices continuing to rise, and the country becoming increasingly dependent on expensive energy imports from unreliable sources abroad.
Bill increases could be blamed on factors beyond their control in international energy markets. Expensive investment in renewables was presented as a solution to the problem of dependence on expensive fossil fuels as well as climate change.
Bill payers were warned price rises would be even worse if the country did nothing and continued to depend on oil, gas and coal. But like so much else, the prolonged recession since 2008 and shale revolution in the United States have transformed the narrative.
The shale revolution has removed the threat of future energy shortages. The squeeze in real incomes has made customers and voters much more sensitive to the impact of rising utility bills. And bills have risen so much for so long that increases are starting to spark public resistance.
Britain already has some of the most expensive electricity in Europe for residential customers. Only the unusually low level of taxes and levies on gas and electricity has kept overall consumer prices close to the EU average (Charts 1-6). And prices are rising much faster than the EU average (Chart 7).
Charts 1-6: link.reuters.com/dyv43v
Chart 7: link.reuters.com/gyv43v
In a large public opinion survey conducted by researchers from Cardiff University in August 2012, keeping bills affordable was the most important priority for respondents (cited by 40 percent) followed by making sure the United Kingdom has enough energy to prevent blackouts and fuel shortages (32 percent). Tackling climate change came a distant third (27 percent).
In a poll published this week, in the wake of Miliband’s price freeze promise, conducted by YouGov, rising energy prices were identified “as the biggest threat to the economy by UK consumers.”
Rising energy prices were cited as a major threat (22 percent) by far more respondents than unemployment (14 percent), the level of welfare payments (10 percent), inflation (10 percent) or taxes (8 percent).
As customers have started to rebel, the consensus between politicians and the energy industry has begun to fray. Politicians have tried to deflect the blame by complaining about “profiteering.” Energy suppliers complain about “policy costs”.
So far the energy price war has been limited to low-level skirmishing. Neither side has risked an all-out battle over who is responsible for energy prices that could call into question the entire energy and climate strategy.
Now Miliband has done just that with his decision to pin the blame for rising prices on excess profits among the energy suppliers and promise to freeze prices between May 2015 and January 2017 if the opposition Labour Party wins the next election.
Miliband’s argument seems to be that energy suppliers are padding their margins, even after allowing for all the policy costs, and that a price freeze can remove excessive margins without harming expenditure on climate-related goals.
But putting policy costs onto bills and blaming rising international energy prices kept the question of how much the strategy was costing away from the limelight. Now it threatens to become a central element in the next election campaign.
By focusing public attention on rising bills, Miliband has invited a much broader debate about just what is driving the bill increases.
Opinion surveys suggest support for policies to avert climate change is broad but not deep. Voters and bill payers want their elected representatives to take action, but only if it does not cost too much.
The scale of the energy transformation will require huge and expensive capital investment. Miliband’s decision to put gas and electricity bills at the heart of a “cost of living” election campaign will test the public’s willingness to pay. (Editing by Keiron Henderson)