Bill Totten's Weblog

Saturday, March 22, 2008

The government cannot leave energy policy to the market

New Statesman Leader (February 28 2008)

The directors of Centrica have been wise to stay in hiding since the energy giant's British Gas subsidiary announced a 500 per cent leap in profits to GBP 571 million, after inflicting a fifteen per cent price rise on customers. But the shareholder bonanza found plenty of apologists.

Britain is no longer self-sufficient in energy and must get used to being buffeted by global events, they argued; Britain is subject to wild price fluctuations because of its deregulated energy market; Britain's more regulated European energy partners do not always play fair (they put their own needs first). All of which is a way of saying that, when it comes to domestic energy needs, the market rules, a view more or less explicitly shared by government.

Such explanations leave the important questions unanswered: why British Gas passes its trading windfalls upwards to Centrica rather than downwards to customers and how a small, populous island can plan a rational energy future while at the mercy of Europe's volatile relations with Moscow and Gazprom (lucidly analysed by Misha Glenny on page 24).

In truth, for incontestable reasons, the government cannot leave energy policy at the mercy of the market. It has clear legal obligations on two fronts. First, it has commitments to vulnerable energy users under the Warm Homes and Energy Conservation Act 2000, reinforced by subsequent strategies to tackle fuel poverty. Second, it has binding international obligations to reduce greenhouse-gas emissions. Both require urgent action. Both have to be forced to work together in a rational energy policy. Cheaper fuel is not conducive to lowering carbon emissions.

The government's hopes of ending fuel poverty - defined as spending more than ten per cent of income on heat and power - by 2016 are on course to be dashed if fuel prices stay high. The number of households now categorised as being in fuel poverty is increasing year by year. Since 2002 it has doubled from two million to roughly four million despite investment of between GBP 4 billion and GBP 5 billion. Meanwhile, its hopes of achieving carbon-emission targets depend on substantially decreasing household emissions, which currently account for 27 per cent of the UK's total.

The failure to square this circle leaves pressure groups, notably Friends of the Earth, questioning whether the government is spending its well-intentioned billions wisely. Two substantial government programmes were intended to acknowledge both ambitions. Warm Front aimed to ensure that those on benefits had access to energy-saving measures. The Energy Efficiency Commitment obliged suppliers to subsidise energy efficiency, particularly for the vulnerable. Neither has protected the poor from rising prices or made an impact on carbon emissions.

The coming Budget offers opportunities. The Chancellor could court instant approval by increasing winter fuel allowances to pensioners and extending their scope to all vulnerable households. This would be only a short-term solution. Fuel use would increase (as people spend money heating draughty homes) and, as prices rose, benefits would also need to rise. Meanwhile, household emissions would remain stubbornly high.

Or, Alistair Darling could be radical. A report recently released by Oxford University's Environmental Change Institute, Home Truths, argued that fuel poverty could be eliminated along with an ambitious programme of cutting carbon emissions. It called for a street-by-street approach to energy efficiency, arguing that an initial investment of GBP 12.9 billion a year for ten years could deliver eighty per cent cuts in carbon emissions, could eliminate fuel poverty and would pay for itself with permanent energy savings of GBP 12.3 billion a year. The average household would have energy bills cut by at least 66 per cent, equivalent to a GBP 425 annual saving at today's prices.

But more is needed. We are too exposed to a far-from-rational energy market. Malcolm Wicks, the responsible minister, has recognised the need for major investment in sustainable alternative energy sources. The Chancellor must now provide the financial framework.

Bill Totten


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