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.