Posts Tagged ‘energy’

The Big Fix

From this month’s Progress magazine: Why we need to break up the big six:

The energy industry has become too much of a cartel. It is time to break it up, argues Melanie Smallman.

This winter more than four million households in the UK will face fuel poverty, as average annual fuel bills rise to £1,345. Coming on top of salary freezes and soaring transport costs, most of us will pay an extra £175 to keep our homes warm and lit. Yet Ofgem is predicting that the companies selling us this energy will see profits leap from £15 to £125 per customer this year. Alongside these price hikes, however, the UK’s energy infrastructure is in desperate need of hundreds of billions of pounds of investment and we are falling far behind in our renewables targets as the energy companies threaten consumers with the cost of going green.

All of this is no secret in the energy industry – the energy regulator, the government and even the companies themselves are aware of the problems ahead. But only Labour is promising the action necessary to address the situation – to break up the monopoly of the ‘big six’ energy companies.

The reason we need such a dramatic intervention is because the ‘market’ that was set up when gas and electricity were privatised in the 1980s has come to function more like a cartel than a proper open market. Energy generators and retailers quickly consolidated and ‘vertically integrated’, so the ‘big six’ now are both the biggest producers and retailers of energy. This means that most trades in the energy wholesale market are within the same company. As a result there is no way of knowing whether or not energy companies are artificially inflating the price of the energy that they eventually sell to households, or to other new retailers who want to enter the market. It also makes it harder for new energy-generating companies – for example, those producing green energy – to find a buyer and an honest price. Over time, all of the energy companies have also taken up the same hedging techniques to price uncertainty, such that a price rise for one almost always becomes a price rise for them all.

The consequence is an opaque market, effectively closed to competition and new entrants. To make this wholesale market more transparent and open we need to stop producers selling energy exclusively to their retail arm without going through the open market. This means creating a ‘pool’ of generated energy that can be bought and sold on to customers by any company, allowing new generators and retailers entry into the market at a fair and open price, but also making the relationship between wholesale and retail prices much clearer. Experts believe that this could reduce utility bills for 80 per cent of customers.

With oil prices predicted to rise for the foreseeable future, high energy bills are, unfortunately, not going to go away. If we are to make a serious difference to people’s energy costs we will still need to move much faster to make homes more energy efficient, ensure we re-examine the current pricing structure that makes electricity cheaper the more you use, and support more community- and cooperative-owned energy companies. But at least with a more transparent market we could be more confident that the energy companies’ huge profits are not coming directly from customers’ pockets this winter.