Green levy cuts could threaten good energy market competition

Big fish eat little fish, hook and worm baitThis post is by Caroline Julian, head of research at the independent think tank ResPublica.

The government’s announcement to reduce energy bills by an average of £50 per household per year will temporarily be a welcome relief, but only for customers of the larger energy companies. The cuts to the Energy Company Obligation (ECO) insulation scheme, which will account for a £30-35 bill reduction, as with other green levies, apply only to those suppliers with over 250,000 customer accounts or 125,000 dual fuel customers, which presently includes the Big Six energy companies plus First Utility.

In the battle against high bills, many have argued that the government is threatening the success of energy efficiency schemes or, at least, the public perception of their importance in driving down consumption and, therefore, driving down costs to the consumer. But might the ECO changes also threaten good competition in the energy market and the government’s support of new and emerging suppliers?

Have the big energy suppliers now been given an unfair advantage?
Currently, most smaller suppliers are able to win over customers based on cost, precisely because they are not subjected to green levies such as ECO. As such cuts will impact on the bills issued by the larger suppliers only, those who own a larger share of the market will now have a greater advantage. You could argue that smaller suppliers have had an unfair advantage. But, to encourage a truly free market, and if diversifying market share to encourage transparency and competition is the goal, shouldn’t we look to further incentivise new and smaller suppliers to start up and grow?

Not long ago, the energy minister, Michael Fallon MP, used ECO as a tool to encourage competition, arguing that the government is “looking very hard at how we can encourage the smaller companies to grow; for example, the ECO threshold, which we have already increased once. If we increased it further…that would encourage them to grow.” And had vowed to “light matches under the feet” of the Big Six energy suppliers with a series of measures to boost competition and help smaller companies to poach their customers.

Collective switching has also been harnessed by the government to attract customers toward a better deal, which can often be sought from new suppliers, who do not yet breach the threshold to qualify for ECO. Reducing the cost for customers of the larger energy suppliers might conversely encourage customers to stay rather than go, based on the new knowledge that their bills will now be lower. As we know from this summer’s Ofgem Tracking Survey, the proportion of customers who switched supplier in the past year had fallen for the fourth year running for gas (to 11 per cent) and for the fifth year for electricity consumers (to 12 per cent). Perhaps we will see this fall even further.

Cutting green levies with no complementary strategy, or in apparent contradiction to other initiatives, will take us back to a purely free market position, in which the larger energy companies are more likely to win. Measures need to be put in place to further enable a diverse market, rather than a return to the status quo.

Government should go beyond the debate about bills and open up the market
Facilitating such competition will require a discussion that reaches beyond the narrow debate regarding the cost of energy bills. And the government can do far more than adjust what it controls. Ramsay Dunning, general manager of Co-operative Energy has argued for the government to compel that all power generation be traded through a single wholesale market to encourage openness and transparency, which reflects Labour’s own proposals. He adds that just as we have a single stock market and a single index, the FTSE, we should have a single power market and an Energy Supply Index (ENSI).

I would argue further that the government should introduce incentives to ensure that competition is based on social and environmental value, rather than price alone, to ensure that independent generators, such as community-owned energy and initiatives that deliver significant social and local benefits, are brokered into the market.

In Germany, which has over 900 licensed suppliers (compared to our 30), customers are flooding to local energy companies that can deliver more than low cost bills. In Schönau, south west Germany, for example, the energy supplier and distribution network, EWS Schönau, operates as a co-operative where the consumers are also the members (and investors) and in which all energy is purchased from local and renewable sources.

As I have argued previously, turning the market on its head in this manner will deliver a truly transformative solution to our cost of living crisis, rather than a return to the status quo.

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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