Utility Week

UTILITY Week 3rd July 2015

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Page 26 of 31

UTILITY WEEK | 3RD - 9TH JULY 2015 | 27 Customers Market view W e are used to thinking about energy in terms of annual spend by indi- vidual households but this can be misleading, especially over time. For example, if consumers use less energy because suppliers raise prices, those would- be savings are partly offset by the higher unit rate consumers face. We also know these price effects differ across the income range (middle-income households react signifi- cantly more than the poor and the rich, for fairly intuitive reasons) and that demand for energy is not very elastic anyway. Further- more, suppliers oen put up unit rates in response, at least partly, to falls in consump- tion so as to maintain their profit margins – and so the cycle perpetuates itself. We can see this pattern of using less energy over time while still facing higher bills using data from the Department of Energy and Climate Change (Decc) in the top graph. On the yellow line read from the le is all the energy used by UK households each year since 1970. It roughly tracks general economic activity and traditionally goes up over time as the economy grows and liv- ing standards rise. Generally speaking, we all used more and so paid more, especially as the number of households grew, we got richer and our technological expectations expanded. In the 1990s there was a pro- nounced drop in spend even as consumption stayed high, perhaps linked to the initial effi- ciency gains from privatisation. Consumption is now on a downward trend that began in 2004, with people becom- ing much more conscious of their energy use and installing energy efficiency measures – and reacting to the price increases during this period. Just look at the overall spend on energy by households (black line, right axis and inflation-adjusted), especially the nearly vertical line in the mid-2000s. Despite using much less energy the overall spend was higher in 2011-13 than it has ever been. If we isolate the 2003-13 (the latest year of these figures available) part of the chart, this increase in spend despite markedly lower consumption is clearer. Indeed, these fig- ures understate the per household demand fall because they do not take into account a much higher population and a higher num- ber of households due to lifestyle changes. If this medium-term trend continues, the pattern would have us not using any energy by the year 2100. Of course, this trend will in practice level off at some optimal point. People have a minimum aggregate energy demand that will then affect the overall expenditure. But all this raises important policy questions for consumer advocates. The primary one is how much of the gains accrued from using less are reaped by con- sumers, and what it means for regulation if suppliers benefit disproportionately. Per- haps this also leads to questions about what constitutes a fair rate of return. It also concerns demand reduction across the income scale and raises questions about schemes like the Green Deal. Connected to this are the problems poorer households always face when unit prices rise (assum- ing they are economising already) and that many demand reduction schemes fall on them in cost but not benefits. It is almost always the case that the more comfortably off can navigate the market better and thus obtain cheaper prices, and that they have enjoyed energy efficiency and other gains too. Surely general taxation would be a bet- ter route of funding for such schemes? How smug can we be about using less overall knowing that at some level people are cut- ting back to a dangerous degree? It is worth remembering that energy spend is ultimately based on a price per unit and that using less, while a clear social good, has pernicious effects that may be worthy of further investigation. We do not want to congratulate ourselves too much if these savings exacerbate existing social and economic problems in the retail energy market. Andrew Hallett, policy manager, Citizens Advice The true price of using less Andrew Hallett explores the relationship between declining energy consumption and rising bills, and says that using less energy might not always be a thing to celebrate. CONSUMPTION VERSUS SPENDING, 1970 TO 2013 CONSUMPTION VERSUS SPENDING, 2003 TO 2013 £3,000 £2,500 £2,000 £1,500 £1,000 £500 £0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 £3,000 £2,500 £2,000 £1,500 £1,000 £500 £0 60,000 50,000 40,000 30,000 20,000 10,000 0 Spend Spend Consumption Consumption 60,000 50,000 40,000 30,000 20,000 10,000 0 Consumption (1,000 tonnes of oil equivalent) Spend (all fuel and power in 1970 prices, £ million) Consumption (1,000 tonnes of oil equivalent) Spend (all fuel and power in 1970 prices, £ million)

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