Saturday, 30 November 2013

How to Lower Energy Bills

The way the energy companies structure their tariffs encourages high consumption. 


Try to imagine a fee structure for gas and electricity that would encourage people to conserve energy. Forget for a moment how energy is delivered and what the costs look like for energy companies. We're not designing it to suit them. 

I suspect that you've come up with a scheme where the price of the energy you buy rises for each extra unit you consume, perhaps something like this.

A rising 'marginal cost' of energy would encourage investment in energy saving technologies


Energy companies have the technology to include information on your bills about how your consumption compares to similar properties around you, perhaps the price per unit could stay low until you exceed the average consumption in a comparison group. 

In this utopian vision, pricing signals would be incentivising people to invest in energy saving measures for their properties to reduce their energy use.  This would then lower the average energy use.  The level at which prices jump would fall over time, driving people to further reduce energy use. 

Burn baby, burn


Instead energy companies have structured prices to suit themselves. There's often a fixed "standing charge" which you pay even if you use no energy, helping ensure they recoup their fixed costs. Then there's a band at a higher price per unit for the first so many units, falling to a lower price per unit for all energy used above this level. 

If I had asked you to design a fee structure that encouraged high levels of energy consumption, you'd probably have come up with something like this. 

Which shouldn't be a surprise, really. 

We've left the fox in charge of the hen house.

The more you use, the lower is your average price per unit. The less well off, struggling to afford their bills and conserving the amount they use are paying the highest price per unit of any of us. 

Unsurprisingly perhaps,  energy companies structure our bills to reward higher consumption


Energy companies are being allowed to structure our energy bills to encourage us all to burn the planet and to discourage investment in energy efficiency.  

The current bluster about freezing prices temporarily or rolling back the 'green crap' is tinkering at the margins. (See my earlier blog - The State of the Debate).  A bold reformer would mandate an inversion of pricing structures to lower costs for the less well off and encourage us all to invest to use less energy. 

This would be market economics red in tooth and claw. Forget the Green Deal, forget Feed in Tariffs and Renewable Heat Incentives.  Forget all of the bewildering array of centrally planned, market distorting energy efficiency schemes.  Price energy use accordingly and watch it all happen based on millions of people doing what's right for them and their home. 






3 comments:

  1. I agree with much of what you say, but I think it's unfair and counterproductive to say:

    "Energy companies are being allowed to structure our energy bills to encourage us all to burn the planet and to discourage investment in energy efficiency."

    That implies that energy companies choose that price structure in order to encourage us all to burn the planet and to discourage investment in energy efficiency. In reality the energy retailers choose that price structure as it most closely tracks their cost base, allowing them to earn a return on their investment without exposure to unnecessary operational risks. Anything less would have their owners/shareholders up in arms about breach of fiduciary duty.

    Why counterproductive? You are demonising energy companies for doing their jobs (and doing their jobs well) whilst deflecting attention away from the people doing their jobs badly that are the root cause of the problem. (the elected government)


    I like your "grading on the curve" suggestion in principle. Those who, relative to others, reduce their consumption pay a lower unit price. I'd be concerned that grandma will choose to freeze for the sake of £50 and cost the taxpayer more in her pneumonia related hospital stay - whilst the young students who are never at home anyway and more au fait with how technology works pay nothing.

    My own suggestion is a personal duty-free allowance. xN units per annum at the discount rate, where N is the number of people registered on the electoral roll at that property, regardless of property type. The latter is important, else you penalise those living in appropriately sized efficient properties and subsidise those living in inefficient oversized properties. It still has the freezing granny problem though.

    So: "Forget the Green Deal, forget Feed in Tariffs and Renewable Heat Incentives. Forget all of the bewildering array of centrally planned, market distorting energy efficiency schemes. Price energy use accordingly and watch it all happen based on millions of people doing what's right for them and their home." Absolutely in principle. Watch out for unintended consequences that may prove more costly than the status quo though.

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  2. Here's the other problem:

    https://twitter.com/DECCgovuk/status/390773965469134849/photo/1

    Total: £1267
    of which taxes of various flavours: £172 (13.5%)
    of which profit: £79 (6%, which is then taxed further)
    of which wholesale energy: £597 (47%)
    of which added value: £257 (20%)
    of which non added value activities: £161 (12.7%, this is the marketing, billing, and administrivia bollocks)

    If wholesale energy prices double my bill only goes up 50%.
    If energy use goes up 50%, assuming that peaks can be managed/capacity factor of the distribution network is improved/we have EVs on night rate electricity etc and therefore network costs don't increase, my bill only goes up 25%
    If we were all to use almost zero energy tomorrow; energy use goes down "100%" then we'd still be expected to pay 50% of the bill in the near term. (the energy retailers must pay for the network infrastructure, they won't be able to fire their non-value-added-activity departments, and the government will still need that tax revenue and will obtain it in some form or another)

    This is a real problem for the gas industry. If we're serious; minimal space heating loads; solar-electric hot water; electric cooking; then the 2050 strategy as well as the save money strategy is to let the domestic mains gas network rot and the companies that go with it to go to the wall. Who pays for that?

    The electricity industry has less to worry about, as it'll likely pick up the slack from supplemental space/water heating of well insulated homes and electric vehicles. The treasury still hasn't worked out what to do about this though.

    Peak oil? 2008 for the UK, at least with road fuels. Ditto peak vehicle excise duty. Revenues are plummeting.

    I'm going to call peak domestic fuel too, seasonally adjusted. Tax revenue from this sector is dwindling too and the treasury hasn't worked out what to replace it with yet. A window and solar panel tax, perhaps? A wind tax? A poll tax? ;-)

    Feeding the a hungry government machine can't be an easy job once the numbers show that efficiency drives are having an effect. Then there are those smokers quitting. Less tax and they selfishly claim their pensions for longer. Those drinkers drinking less. It's a non trivial headscratcher at the Treasury. Aside from printing it to steal from those with savings, where can an government that wants to be reelected obtain money from?

    (printing money and immigration appear to be the current approach)

    I'd suggest punitive taxation of profligate energy users who are most capable of footing the bill/financing the efficiency improvements. Retailers, businesses occupying mostly office blocks, and domestic customers using over 20MWh/annum would like me as energy minister. ;-)

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  3. Only one way that lowers home electricity Bil and that is the use of LED as they are known as 30% more Best Energy Saving Lights

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