Why David Cameron’s tariff intervention was anything but smart

Tackling rising energy bills is an admirable goal, but the Prime Minister has revealed he has no idea how to achieve it

18 Oct 2012, 16:09

As luck would have it, at the same time as David Cameron was yesterday emulating a mid-ranking Soviet official circa 1974 and detailing how energy companies will be forced to give customers their lowest tariffs, I was on the Isle of Wight finding out precisely why Number 10's plan is not only unworkable, but could also do immense damage to the future of the energy sector and the UK's efforts to cut carbon emissions.

As you will no doubt already be aware Cameron used Prime Ministers Questions yesterday to blind-side the energy industry, the media, and his own Department for Energy and Climate Change (DECC) by announcing that the government "will be legislating so that energy companies have to give the lowest tariff to their customers".

Within 24 hours a move that was initially welcomed by those consumer groups who campaign for lower energy bills with scant regard for the necessity of new investment or the realities of complex global wholesale markets, was unravelling faster than a George Osborne budget announcement.

Sources close to Energy and Climate Change Secretary Ed Davey let it be known he had not been informed of the Prime Minister's intervention and had no current plans to change the Energy Bill so that "companies have to give the lowest tariff to their customers", while Energy Minister John Hayes conducted a master class in parliamentary bullet-dodging by repeatedly ducking questions on precisely what the Prime Minister was talking about.

More important still, energy companies and independent analysts explained that if the Prime Minister's dictat is to be taken at face value then the plan, such as it is, is both unworkable and almost certainly in violation of European competition law.

There is a legitimate argument for getting energy companies to make their tariffs simpler and more transparent, but you can't simply force them to offer the same lowest price tariffs to everyone, regardless of circumstance (what would happen to green tariffs or discounts for online billing?). It is a recipe for energy companies to shelve investment in technology innovation, ditch their green tariffs, and move all tariffs towards the top end of their pricing range. As the Federation of Small Businesses (who are anything but apologists for the Big Six energy companies) observed this morning, an attempt to force energy companies to put customers on the cheapest tariff "could lead to price fixing and erode what little competition there is in the market".

This latest fiasco created tremendous fun for lobby hacks, a bit of a headache for Labour, which has hinted at similar plans for over 75s, and some much-needed attention for an Energy Bill that has actually been subject to this level of confusion for months.

But more seriously it laid bare the extent to which the Prime Minister fundamentally misunderstands the potential revolution currently under way in the energy market and has absolutely no sense of how to tackle the very real problem of rising energy prices.

As mentioned, while all this was going on I was at the Ecoisland Summit on the Isle of Wight watching the first public demonstration of the island's embryonic smart grid network. The plan currently being pursued by SSE, IBM, Cable & Wireless, Silver Spring Networks, and Toshiba, is to deploy smart appliances and smart grid integration across 1,000 homes as part of an initial trial, offering customers the chance to access lower energy tariffs in return for them agreeing to the automatic powering down of non-essential technologies whenever the grid needs to lower peak loads.

To demonstrate the concept, John Hayes (he of the evasive Commons tactics) was invited to hit a button on a smartphone and automatically turn off a beer fridge and electric car charge point on the other side of the island.

The Ecoisland initiative has plans to deploy this technology across the island by 2020, while the likes of SSE and IBM hope to use the technology as a pilot for a much wider national rollout. It is a genuinely game-changing approach that promises to slash emissions, reduce energy costs by curbing the need for new power plants, and give domestic and commercial customers much more control over their energy use.

The one small problem is that this smart grid vision becomes much harder to realise if the Prime Minister gets his way and people are forced on to the lowest tariffs. If we take Cameron at this word (and I must admit it does increasingly look as if he misspoke) then energy companies would effectively be required to axe green tariffs and would find it all but impossible to develop the kind of complex, and yet potentially cost-effective, tariffs smart grids enable.

The beauty of the smart grid is that it allows much more complex and individually tailored tariffs where you might pay significantly more for power used when Coronation Street is on and the grid is under pressure, but virtually nothing for power used outside peak times. The net result would be reduced emissions and significantly reduced bills for those people savvy enough to deploy smart appliances and shift their energy usage patterns slightly. All of this will be much harder to achieve, and perhaps even impossible, if draconian legislation is brought in forcing energy providers to give customers set tariffs.

Unfortunately, genuine smart grids will take at least a decade to deploy, which leaves all political parties facing the important question of what can actually be done now to tackle energy bills that are placing significant financial pressure on households up and down the country.

The answer is complex, demanding, and a million miles from the legislative quick fix proposed by the Prime Minister.

The simple fact is that after two decades of under investment in British energy infrastructure, prices are going to rise over the next decade, completely regardless of whether we choose the environmentally sensible path of investing in a mixed portfolio of new generation technologies or take our chances with global gas prices and follow the Chancellor's preferred plan for a new "dash for gas".

Despite the ongoing row over the cost concerns associated with renewable energy and nuclear power plants and the environmental and price volatility risks associated with gas and coal, there is quite simply no way to square this circle, and the sooner politicians stop arguing over tariffs and come clean about this reality the better.

In the longer term there are just three interrelated steps government can take to tackle energy bills.

First, they need to continue with efforts to encourage more customers to switch suppliers, force energy companies to be more transparent about how tariffs work, and make good on pledges that the Energy Bill will encourage more competition in the market. The only way we are going to get to a scenario where the Big Six energy companies do not continuously raise their energy prices in lock-step is if we nurture emerging challengers such as Ecotricity, Good Energy, and Smartest Energy and make it possible for them to compete on a level playing field.

Secondly, government needs to show yet more ambition across their various energy efficiency schemes, starting with some clarity on how the Green Deal will be incentivised and a revival of ministerial interest in the under-reported smart meter and grid programme.

And thirdly, they need to stick with the long-term goal of the Energy Bill and deliver a balanced and largely decarbonised electricity generation portfolio that reduces our reliance on imported gas (which is responsible for the vast majority of the recent increases in prices) and delivers on the UK's carbon targets. Prices will fall in the long-term if we move to increasingly mature renewable energy technologies that require no fuel inputs to generate electricity.

Maybe David Cameron did indeed mis-speak, maybe he was distracted by the continuing row over Andrew Mitchell, maybe the Energy Bill will make the government's long-term plan for a clean and modern energy sector crystal clear.

We can but hope so, because the alternative is that the Prime Minister has not the faintest understanding of how the energy market works.

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Previously known as the BusinessGreen Blog, James' Blog features musings, observations and occasional rants from BusinessGreen editor James Murray

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