Energy Prices: no matter what we do the only way is up

In the United Kingdom the growing cost of energy has dominated the news. People must now pay significantly more for gas and electricity (and fuel oil and portable gas) than most of them ever expected to pay. The average fuel bill for a UK home is now £1350 each year. More and more people are being driven into fuel poverty and more and more people have to economise on energy.

It will not help the debate to say that I have been warning about energy prices for ten years and that some of my predictions of future prices are beginning to look decidedly low. At a time not so long ago when the average energy bill was £800 and I predicted a 10% year on year price rise I was heavily criticised. No authority, governmental or quasi governmental, agreed. Now prices have risen everyone is talking about energy prices. Everyone says something must be done but everyone is missing the big picture, which is that very little can be done.

The government’s present policy of encouraging competition by bringing new entrants into the market and switching suppliers in the hope of saving a few pounds on their energy bill is misguided.

New entrants would stimulate competitor and may act as a restraint on energy prices. The problem is that all new entrants will have to buy their energy from the wholesalers, who are the big six energy suppliers. A new entrant could not possibly afford to set up a vertically integrated energy supply company and invest billions of pounds in buying fuel forward, building power stations, setting up a retailing operation and selling energy to the public. All a new entrant can do is to buy energy from wholesalers who are the big six. Any business thinking of establishing a business that is dependent on buying its product from a competitor, who is much larger and more powerful and who competes in the very same market would be a basket case.

Switching suppliers is what the government encourage but even if the process were simplified there is no guaranteeing that when you switch you will end up paying less over the period for which you have switched.

There are only two solutions:-

 

  1. Nationalising the energy industry with all the inefficiencies that will develop; also nationalisation will give politicians another type of largesse to bestow on their mates and supporters.
  2. Specify a single pricing structure which abolishes standing charges and progressively charges more for energy the more a consumer consumes. Some thought should be given to having a single price structure for gas and electricity to which the energy companies must adhere and let the energy companies compete on efficiencies rather than on price.

 

The problem with the debate on energy prices is that those in the debate ignore the future and concentrate on the present. Consumer gas prices in Germany and France and many other European Union countries are significantly higher than in the United Kingdom. The UK gas price will catch up to the German gas price in the future and that will add another couple of hundred pounds on the average energy bill. Once prices have caught up, the only way they have to go is upwards as population increases, resources are used up and become more expensive to exploit and as the developing nations become more prosperous and develop into our habits and expectations of energy use.

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