There’s a lot of debate in left-wing-commentaryland at the moment about electricity and gas prices, ‘fuel poverty’, and how these relate to the profits made by energy companies.

The problem is, the debate is nonsense: UK utilities are losing out from high energy prices - and utility bills are currently far too low in any case. Fuel poverty is a measure of a desire to live a particular kind of lifestyle, and if we’re going to cope with energy scarcity and climate change then people need to understand that it’s a lifestyle choice that has real costs.

British Gas Is Not Gazprom

When energy prices are high, the profitability of companies and the national income of countries which control energy-producing resources rises. Gazprom is doing very nicely; Saudi Arabia is making a great deal of cash; Hugo Chavez has been able to partly spend his way out of unpopularity; and the UK government has gained a nice bucketload of extra oil cash to make up for slowing growth in the wider economy.

However, this doesn’t hold for consumer utilities.

There are a couple of important things you need to remember here. One is that, to a close approximation, domestic energy consumption in the UK involves buying gas from international markets and either burning it to make electricity and selling it to consumers, or selling it directly to consumers (yes, we make some energy from nuclear, hydro, coal, Frenchmen, etc, but gas is the largest source and the most rapidly flexible, hence it sets prices for marginal capacity).

So utility companies’ costs when selling to domestic consumers are dependent on the global oil price (which is the most important determinant of international gas prices, for mildly obscure reasons) combined with any UK-specific wholesale gas supply issues, whereas their revenues are dependent on household gas and electricity prices. They don’t make the gas themselves [*].

Jump up, jump up and jump down

Despite relatively expensive oil over the last few years, UK gas prices fell to unusually low levels in winter 2006/07 and remained low throughout 2007, because a whole load of new pipelines and LNG capacity came online.

(pipelines bring gas from the North Sea or Norway to the UK into the gas network; LNG terminals unload gas from compressed tanks on boats into the gas network; between them, they account for all our gas.)

However, this price drop was a one-off relief from removing previous capacity constraints, and meant that in future the UK gas price would track world markets even more than it previously did. Data on spot UK gas prices is hard to get hold of, but according to a recent PA article prices have reached US$20 per million BTU for delivery next winter - compared to the BP index number for 2007 of US$6.

They take it so you don’t have to

Even if this increase is overstated due to methodology changes, it’s clearly enormous - and it’s clearly not being reflected by rises in domestic tariffs, with the exception of British Gas’s rather comedy “ I’m an idiot, steal all my money” price plan (note for people who don’t understand commodity markets: for the love of all that is holy, you don’t tie your second-largest regular outgoing to spot commodity prices).

So utilities’ costs are rising a lot, and their prices are only rising a bit. You don’t need to be an ACA, a CFA, or even numerate, to notice that this will have a negative impact on profitability. Accusations that utilities are profiteering from high energy prices are somewhat off the mark - indeed Centrica (the company behind the British/Scottish Gas brand) has issued a warning for the current financial year that retail profits will be down because high gas prices can’t be passed on fully to consumers.

(more astute observers may observe that wholesale price falls also aren’t passed on fully to consumers - and the most astute observers of all may observe that the record profits seen in previous years were for exactly that reason. This is entirely true, but doesn’t help much - for those consumers who wanted to take price risks themselves, tariffs like the British Gas one above were available; for the rest, we were happy to take short-term price cuts below market trends on the understanding that future price rises would be below market trends too. And they are.)

I demand relief for my booze poverty

In my first job, in 2000, I earned £12,000 per year. Of that money, I paid, let’s say, £2,000 in tax and NI, spent £4,000 on rent, £1,000 on bills, £2,000 in travel, £750 on cigarettes, and £1,500 on booze (the rest I wasted). This was because I’d decided to make a lifestyle choice to combine not earning very much money with going out drinking and smoking a lot.

If I were to claim that that left me in booze poverty, because I was spending more than 10% of my income on booze, and that this represented a serious social problem that should lead to lowered booze taxes and to the government forcing booze companies to slash prices, then you’d call me stark raving mad, rather than sympathising with my terrible personal predicament.

Now, according to , total electricity and gas bills for a 2-bed flat with average insulation levels and with the heating left on all day would be around £650 per year. The average pensioner couple gets £7,296 in state benefits alone, so - even though they live in a larger flat than they really need, and even though they haven’t taken advantage of free insulation grants to raise insulation levels to good (which would cut energy bills to under £600 for the same property).

In order to reach the 10% fuel poverty level, incurring £730pa in bills, our hypothetical state-benefits-only pensioner couple would need to be living in a 3-bed, uninsulated, semi-detached house. This is no longer a case of being able to afford basic food and shelter - this is a case of making a lifestyle choice to live in a much larger, more energy-consuming dwelling than you need, and then claiming poverty [**] when you find that this is an expensive thing to do. Just like my booze poverty a few years ago, in fact.

Time for a change

In short, the reasons why utilities are being blamed for fuel price rises are:

1) nPower’s name appears on your bill, not Putin Medvedev’s
2) a company’s most recent published annual profit data will, on average, cover a period that began almost two years ago
3) people don’t understand that the price of energy has really, actually changed for real actual reasons, and that consumption really, actually needs to be adjusted as a consequence.

This lack of recognition isn’t confined to the UK, or to the left. As Tim has spotted, Obama appears to be planning utility bill rebates funded out of carbon taxation, which wins the away-with-one-hand-back-with-the-other award, while Hillary and McCain’s petrol tax holiday plans are a manefestation of the same outlook.

The fact is, we use more energy than we really need to, and the level of energy use considered to be ‘baseline’ is not the minimum level required to have an adequate lifestyle. Just as we don’t expect people on low incomes to be able to afford caviar for breakfast, or to spend every night in the pub, we shouldn’t expect them to be able to heat large, half-empty, poorly-insulated houses 24/7.

Finally, if we do want people on low incomes to be able to afford such luxuries, then we should provide them with more money to spend, in cash, through the benefit system or targeted tax cuts - rather than through forcing the purveyors of caviar, beer or energy to cut prices for lower-income consumers.

[*] Centrica is two companies - a UK retail utility, and the owner of a gas field in the North Sea. They’re grouped together for historical reasons (when British Gas was split up into retail arm Centrica and exploration arm BG, there were fears that Centrica would be unviable without a hedge against high commodity prices), but accounted for separately. Obviously, the gas field benefits when energy prices are high.

[**] This is slightly unfair - “fuel poverty” is a term made up by do-gooders, rather than something that the “fuel paupers” in question have claimed for themselves, shortly before being sent to the “fuel workhouse”.

Filed under Britain, Economics, Energy.
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