A compelling case for energy bill rationalisation: Make the profligate pay

Take a close look at your energy bill. The initial amount of energy you have used is charged at a higher rate. Shouldn’t the opposite occur to discourage energy waste? Andrew Warren, director of the UK’s Association for the Conservation of Energy (ACE) makes a compelling case for reversing such a perverse price signal in a recent edition of his organisation’s Warren Report.

Mr Warren points out an obvious anomaly, and one wonders why is hasn’t become more widely discussed and publicised.

 To quote from his excellent report:

“It does seem clear that gas and electricity charges are currently levied at rates that seem deliberately to discourage frugality, and perversity describes precisely how all fuel bills are calculated. Look at your own gas or electric bill. The initial kilowatt hours consumed each month are charged at around three times the price of subsequent units. The result is that those who practise careful consumption are penalised. Whereas there is effectively a volume discount on profligate energy consumption.

Now, opinion formers like Which? are overtly hammering the absurdity of thrifty consumers “paying more than a third extra per unit than someone who uses twice as much”. Both practically, and in particular psychologically, this is no way to impress upon consumers the value of energy conservation: this is prima facie not the way to alter perceptions of value. “

The report points out that this is also not the best way to help poorer households: Consumer Focus have found that 85 per cent of low-income households consume less energy than average, and therefore pay more per unit. With over 5m households now in fuel poverty, there is a real urgency to turn the price signals round. Instead of being many times more expensive, the initial amount of energy use should be priced at a lower rather than higher rate.

This concept, the ‘Rising Block Tariff’, could be implemented in a number of ways. As in the conventional model, energy companies could be obliged to increase the unit price of the energy underwrite the basic needs of fuel poor households and subsidise fuel-saving measures could be increased, with impunity. No longer could it be said that these policy costs were harming the fuel poor. Instead, only the profligate would underwrite them.

Clearly, with government ministers currently looking hard at the way in which energy companies charge their customers, there has never been a better time to overhaul the way in which energy bills are worked out.

Andrew Warren points out that Tim Yeo (currently chairman of the Commons select committee overseeing the DECC) acknowledged the absurdity of offering lower rates for extra expenditure when he was environment minister twenty years ago. He recognised then that what people wanted to buy from an energy company was not a commodity, equating kilowatt hours with detergents or soap flakes. It was services like light, heat, motive power, which could be provided satisfactorily by burning fewer units of power. He pressed for the introduction of rising block tariffs. Sadly he did not succeed at the time, quite possibly because climate change and energy policy were run by different government departments. But also because the pressing need to reduce energy consumption was then scarcely acknowledged politically.

Time has now moved on. Both policies are under the same management now, and we agree that now is clearly the time to reverse these absurd incentives for profligacy.