ENERGY prices are too high in Britain, even after the recent cuts in gas prices. But those tempted to join in the populist rage at British Gas-owner Centrica’s results yesterday – UK profits hit a new record, though global earnings fell – need to understand all of the forces at play.
It is true that sometimes there is a lag between declines in wholesale prices and those charged to consumers – but this appears to be entirely caused by the fact that firms are tied into long-term supply contracts. Ofgem, the regulator, wants to make it easier for smaller firms to compete against the top six suppliers; this makes a lot of sense as long its proposals don’t turn instead into an attempt to micromanage the industry.
Profit margins at Centrica’s UK residential business were 7.6 per cent in 2009, in no way excessive (the firm made post-tax profits of £38 per average customer). This is not to say that the industry is blameless, however. The real problem is the extraordinarily costly green regulations supported by all major political parties as well as by the industry itself. The Department for Business, Innovations and Skills estimates that government policies are already responsible for 14 per cent of total domestic electricity prices. There is a simple reason for this: the Renewables Obligation requires companies to source ever more of the electricity they supply from renewable sources. The government has accepted European targets for far-reaching change by 2020; but as ever we seem to be going further and faster than everybody else. The result is a hidden tax on everybody’s utility bills – one which the green lobby doesn’t like to talk about.
Building expensive wind turbines and other green energy investments is expected to cost Britain €161bn by 2020. That is more than Germany (€72bn), France (€56bn) and Italy (€23bn) will be spending combined, according to research by Matthew Sinclair of the TaxPayers’ Alliance. The good news is that not all of this is being picked up by the taxpayer; the bad news is that the private firms that are shelling out need to make a return on their investments, which means higher prices for consumers, especially given that the whole issue suffers from significant political risk. Citigroup calculates they will need to meet a hurdle rate of 9.2 per cent before tax, which means that prices will eventually have to double for firms to make a decent return on their capital. As ever, those who will suffer the most are the poor who already spend a large proportion of their incomes on utility bills. This is something the middle classes, who don’t mind paying more to assuage their green conscience, should bear in mind.
New forms of energy are great. I would love to see the day when electric cars run as powerfully and cheaply as petrol-powered ones. But that is very different from jacking up prices to consumers by imposing ridiculous targets for renewables, especially given the growing uncertainty surrounding mainstream climate change predictions. The only answer is to scrap the renewable targets and to find other, more efficient ways of meeting Britain’s energy needs. That will probably mean better gas-powered plants; it might even mean more nuclear. It certainly shouldn’t mean building thousands of expensive wind farms regardless of cost at a time when firms and families across the country are facing years of austerity.