'Lowest energy tariffs' do not necessarily mean lower bills, experts warn
UK Prime Minister David Cameron recently announced that he would pass a law forcing energy companies to offer their customers the lowest tariffs available, but this will not necessarily translate into cheaper energy bills, EU energy experts warn.
While Cameron might in theory be able to keep his promise of making sure energy companies offer the lowest tariffs, this will not necessarily mean that consumer bills will be lower.
This is mainly due to rising energy prices. The Paris-based International Energy Agency last year declared that the age of cheap fuel was over.
Paying more for less?
Moreover, in Europe, energy bills may increase because of various policy decisions taken at EU level, to which the UK government has signed up to.
The EU’s Energy Efficiency Directive, which was recently adopted by member states, requires energy companies to deliver 1.5% more energy savings every year. This is the area with the most detail in the directive and the one which is likely to bring the most of the 20% energy savings that the EU is hoping for by 2020.
As utilities will have to achieve additional savings every year, they will start implementing energy efficiency measures for their customers – measures which will see electricity prices go down in the long-run, but which require initial upfront costs.
But energy companies fear they might end up being squeezed between the governments’ ambition to deliver energy savings and the promise to consumers to keep energy prices low.
“The concern is that energy companies will end up paying for everything ,” said Nicola Rega from trade group Eurelectric, adding that energy companies were an easy target for public opinion.
Bogdan Atanasiu, of the Buildings Performance Institute Europe, said there are two ways governments can do this. “You either take money from the public budget – to which not every citizen really contributes – or you raise the energy bills, ensuring everyone will pay.”
It is not yet clear who will finance this 'fair' solution and the most probable scenario will see a so-called 'socialisation of the cost' between consumers, even if not all can afford to insulate their homes or switch to more efficient boilers.
"We should not forget that many consumers – especially low-income families – have already reduced their consumption as much as possible but are still hit hard by price increases," said Johannes Klein, of the BEUC consumer group.
Energy efficiency, possible catalyst
In implementing the changes brought by the new efficiency directive, there has been a broad accord that policies must encourage consumers to use less energy. This would require political commitment and public awareness campaigns.
But while policymakers, energy companies and NGOs concur on the need to communicate, politicians are reluctant to handle what has become a hot potato.
“What most politicians tend to do,” Rega said, “is that instead of motivating citizens in taking action, they shift the attention somewhere else, saying: energy prices go up because of energy companies.”
“They forget all the added costs that pile up in the energy bill, such as taxes, incentive schemes, obligation schemes, network charges, fuel prices,” Rega said.
For example, it is likely that new taxes will be needed to fund smart metering systems and grid improvements or that cuts elsewhere in public budgets will be needed to fund them. Ultimately the consumer - private and corporate - will pay.
One alternative is using energy more judiciously.
"We need to look at it the other way round: energy efficiency measures tend to push down energy prices," said Brook Riley of Friends of the Earth.
Europe aims to reduce its primary energy use by 20% by 2020, a target which is not legally binding.
The Energy Efficiency Directive was proposed by the European Commission in mid-2011 as part of its effort to reach this objective. The European Parliament and Council, together with the Commission, reached a deal on the proposed directive in June 2012.
- Proposes individual measures for each of the sectors that could play a role in reducing energy consumption - apart from transport, which is voluntary. This includes a controversial obligation on energy companies to achieve 1.5% energy savings per year on their customer's bills.
- Asks member states to develop long-term strategies for the energy-efficient refurbishment of Europe's building stock.
- Obliges authorities to renovate public buildings, although this only applies to those "owned and occupied" by national governments, not regional or local authorities.
"The statement by Prime Minister Cameron is an acknowledgement that competition in the energy retail market has failed – something our UK members Which? and Consumer Focus have been decrying for years. Trust in energy companies is at an all time low and switching levels are falling. In such a context it is crucial that governments step in and make sure people get a better deal," said Johannes Klein, of European consumers' organisation BEUC.
"I think Cameron is saying something consumers want to hear but it will be different to turn words into action. It will take time – even if the government is genuinely committed to taking on the energy suppliers," said Brook Riley of Friends of the Earth.
"It’s always good for the government to recognise that consumers are getting a bad deal from the energy suppliers. This raises awareness of the issue and encourages solutions. Cheaper tariffs are just one solution. Others are energy efficiency – which tends to push down prices - and policies to encourage consumers to switch suppliers," Riley added.
"The best way to bring down the amount consumers spend on energy would be to concentrate on delivering energy efficiency and savings. Effective policies to better insulate buildings, improve public transport and make products more efficient would reduce the amount of energy consumers have to buy. But they'd also lower the prices of the fuel and power people do purchase: smaller demand will eventually mean lower wholesale fossil fuel and electricity prices, and less investment in energy infrastructure," said Erica Hope of Climate Action Network Europe.
Looking across the EU, these combined effects of greater efforts to deliver energy efficiency and savings could deliver €200 billion of net annual savings by 2020, according to research by Ecofys commissioned by CAN-E and Friends of the Earth Europe earlier this year, she added.