Energy switching is dead, long live the market in energy saving

This post by Green Alliance’s director Matthew Spencer first appeared on BusinessGreen.

The Prime Minister created a storm when he announced that energy companies would have to put consumers on the lowest energy tariffs, but he may have done us all a service if his intervention helps kill one of the most persistent myths of the UK energy debate: that getting consumers to switch tariffs would make energy bills more affordable.

Why switching is a zero sum game
High profile campaigns from  consumer group Which? and endorsements from politicians of all parties have created the impression that rational consumers chasing the best deals will bring down the nation’s energy bill. The inconvenient truth is that it robs the passive majority to pay the active minority of consumers. Energy companies follow commercial logic and offer the best deals to the ‘marginal voters’ who will switch, and pay for the deals with the passive majority who never will.

The big six are no angels, but in this case they are not the villains.  The energy retail market is an easy target, but it is not a high margin business.  The profits come from aggregating huge numbers of small margins- the evidence suggests suppliers do well to make £50 on an average £1300 household bill. This makes switching tariffs a zero sum game and means that it can’t bring UK household bills down. It shouldn’t be a surprise since we’re all buying the same gas whichever brand we choose, and it’s the rise in gas prices that has driven up consumer bills.

Only two ways to lower bills
Unfortunately this means that the Prime Minister’s solution – to put everyone on the cheapest tariff won’t work either – since the cost of the cheapest tariff will go up if it’s the one everyone is using. The truth is that there are only two ways to lower bills:  either by finding a new source of cheap supply, or by reducing our energy consumption. Fracked gas provides the allure of cheap supply for some but, put simply, it’s only cheap in the US because it’s dirty. On the beautiful and crowded British Isles we won’t take the same risks with our environment and it won’t be cheap. In the medium-term renewable energy technologies with no fuel costs, like wind and solar, provide a much greater protection against  the rising costs of imported fuel, and are already helping reduce peak power costs in some countries.

A real low cost solution
But in the UK we don’t have a new source of cheap supply available right now. What we do have is something even better: loads of inefficient appliances and equipment that use more electricity than they need to, which can be replaced at very low cost, reducing electricity bills in the process. And here we can learn a great deal from the US, where a number of states have created a market for electricity savings or ‘negawatts.’

These programmes really work – they have reduced the number of new power stations that need to be built and have delayed or even prevented grid upgrades. They have saved consumers considerable amounts of money. Appliance replacements and efficiency retrofits in the US avoid electricity consumption at nearly a third of the price of new supply. They replace an expensive megawatt of electricity which costs perhaps £100, with an avoided megawatt, or negawatt, which only costs £30.

So if we want consumer bills to fall, we need a better sort of competition: between power supply and power saving. It helps to overcome the problem that power companies can currently only make money by selling more energy, not by selling cheap avoided energy.  The negawatt market is thriving in Texas, where new energy service businesses are using the system to help pay households and companies to upgrade to the most efficient appliances and equipment. It could be active in the UK within a year if David Cameron chooses to introduce an electricity saving market in the Coalition’s Energy Bill.

About Green Alliance blog

Green Alliance is a charity and independent think tank focused on ambitious leadership and increased political support for environmental solutions in the UK. This blog provides space for commentary and analysis around environmental politics and policy issues as they affect the UK. The views of external contributors do not necessarily represent those of Green Alliance.
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3 Responses to Energy switching is dead, long live the market in energy saving

  1. perry525 says:

    There is a glut of natural gas in the USA and Canada.
    The result domestic and business prices have come down.
    This has lead to USA companies bringing back production from China and other cheap manufacturing countries.
    Our power supply companies are running a cartel and have no wish for their cosy arrangements to be destroyed by cheap natural gas, hence the expensive and sustained programme of articles “proving” how bad it will be for the UK.
    If we want to increase our exports and be competative, we must have cheap power.

  2. Chit Chong says:

    Dear Perry, I think that you are building a tenuous argument on shifting sand. Gas in the US is cheaper than expected because of tracking which is a pretty expensive way of extracting gas sometimes with rather nasty side effects. However, energy costs is not the real reason that production went to China as a larger manufacturing cost is labour. In addition, there was a fashion promoted by neo-cons and other barmy economists and politicians that the West was “post industrial” and we should concentrate on the “knowledge and service industry” by which they meant banking. As a result, the likes of Tony Blair and Bush became very banker friendly and manufacturing unfriendly. The rest is history and in this history, our very cheap and still cheap energy only plays a side show. We will have to wait till serious carbon taxation before that changes.

  3. Thought-provoking, but it is not easy to follow your conclusions. You say: “The inconvenient truth is that it robs the passive majority to pay the active minority of consumers.” Do you think that robbing the active minority to give to the passive majority is somehow better? The general thrust of your argument is that energy switching is holding back energy efficiency. Can you prove this?
    I don’t see why energy switching cannot peacefully co-exist. One more thing: The Big 6 are definitely the villains ;).

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