Shining a light on the energy industry
Written by Sabina Khan
How should we take the recent news that the big six energy firms together have generated over £3bn in profits in each of the last two years coupled with the average household energy bill rising by over £300 or 28 per cent since the coalition came in to power?
Some might say it is a good thing, showing how companies can prosper in a harsh economic climate thus creating jobs and investment sorely needed in the country. The majority of people though I suspect would say (and feel) something quite the opposite. In fact, for the two million plus households in fuel poverty (equivalent to more than one in ten families) this is something akin to the straw that broke the camel’s back. What they and many other ordinary families see is spiralling energy costs taking up more and more of their disposable income and having to make harsh choices, sometimes between food and warmth and others are in a situation where their biggest cost after rent is for electricity, gas and water.
There is no doubt that Labour could have done more during its previous time in government to correct the inevitable inequalities and problems which came about from Thatcher’s privatisation spree which was primarily driven by private business’ agendas and not that of the ordinary man and woman left to suffer the consequences.
How do the energy firms justify these price rises? They claim that wholesale prices have risen by 25 per cent and that justifies the rise in retail prices. Ofgem, the industry regulator, recently carried out an investigation into whether the market was operating competitively and came to the conclusion that it was. So on the face of it, there is nothing to see or do here.
However, if we look at what happened leading to the banking crisis, we had a situation where highly complex products and services were being created and sold by banks and given a clean bill of health by the regulators and governments. These same products were actually toxic and represented a shadowy market with inherently unsustainable risks within them which no one in government had the leadership, desire or any contingency plans in place to mitigate any potential problems. The banks found themselves in an environment where they could take any risks, hold absolutely minimal levels of capital in the full knowledge that they were still operating within regulatory parameters. Only now are steps being taken by governments to properly define what banks can and can’t do and what our expectations are of them. It took the nationalisation of banks, recession, living standards dropping, business confidence down, over one million young people unemployed and the poorest being hit hardest to understand and start doing something about the banking system.
In the same way, let us be clear that with energy, there is a retail side where Ofgem is more involved (perhaps helping to save a few pennies here and there) and a much less transparent wholesale side where the energy companies have free reign to buy and sell energy within their own holding companies and highly complex trades are being made daily and where potentially the greatest mark-ups can be made.
If we are to ensure that the customer is not being ripped off we need a Labour government who will not turn a blind eye in favour of corporation tax receipts but who will show no fear or favour in scrutinising and for example, setting wholesale cost parameters for the energy companies who supply in the UK to adhere to. Instead of the limited Ofgem we need a government backed regulator with real teeth and a much wider scope to investigate and hold companies to account and which can look at the whole picture from wholesale buying mechanisms through to infrastructure investment and retail. Put simply, the energy market cannot be left solely to the market and requires the government to take meaningful steps to curb excess profits through potential manipulation.
This new regulator would need to have price setting powers which Ofgem does not have. The regulator would, after carefully considering relevant factors, set an indicative wholesale price for a period of time that energy companies have to use as a cost reference when determining retail prices for customers in the UK. This has several advantages. First, it will ensure that the energy companies work harder in finding and buying more cost effective and sustainable energy sources and work more innovatively and closely with energy generation companies. Second, there will still be competition in the retail side with companies being able to set their own prices within a framework where the regulator would set parameters for the costs associated with supplying and maintaining services. This would ensure that companies are not simply inflating costs to protect margins. Thirdly, it would give longer-term price stability for end users and help to focus energy companies on making their supply chain more efficient.
This is the right thing for Labour to do and through this it will be championing all those low income as well as squeezed middle income families whose standards of living are only going one way under this coalition – down. In Britain in 2013 is it too much to expect everyone to have warmth and to be able to use their cookers to make meals for their families, hot water to wash and keep themselves sanitised and lighting for safety and security? The choice should not be between food on the table or basic heating and sanitation.