This week Ofgem announced that the price cap would be reduced to £2000 from a previous level of £2500. The BBC reported this as bills set to remain high.
A reminder on how the price cap works. The cap is really a cap on the unit price for Electricity and Gas, for Electricity the cap is 30 pence per kWh and for gas it is 8p per kWh. There is also a cap on the standing charge which is now 53p per day for Electricity (£193 per year) and 29p for gas (£105 per year) – about £300 per year in total.
Firstly, any reduction in costs for consumers has to be welcomed. Too many people have faced very tough choices throughout the winter on whether to heat their homes and water or to eat. An average of £500 per person will make a difference.
We have to look at the structural issues behind the charges. For example, why is gas about 1/3 of the cost of electricity? The first and most obvious answer is that producing electricity is a lot more expensive than using gas. The reasons for this include – electricity generation from fossil fuels is extremely inefficient, over half of the energy used is wasted. Electricity networks are far more complex and need to be balanced second to second, rather than gas networks which are balanced more like hourly and in some cases daily. The majority of green charges are put on electricity bills, whilst the carbon intensive gas bill has very little.
The standing charge is also an interesting area. The £193 (around 10% of the bill) for electricity does not represent the fixed costs of providing the electricity network – these are much higher, in reality they are more like 50% of the cost. The same is true for gas, the huge assets that are the gas system are a significant part of the real cost of energy.
Are we missing an opportunity to change the game here? I believe so. We could do several things:
1. Switch the green levies to gas – this would help to incentivise the heat pump roll out
2. Increase fixed costs – difficult for low users, but not impossible – most people spend more than £1000, so the £300, could quickly become £500
3. Include an Energy Transition charge on the bill – provoke the debate on who should pay and how
By not exposing the real cost to consumers we distort markets and by not providing cost transparency we are not having the debates that we need.
