Energy and Climate Change CommitteeWritten evidence submitted by Brian Mongey

Prices

1. The elephant in the room is the fall in the value of sterling and its influence on energy prices. The “Worthless Pound Policy” being championed by the Bank of England is responsible for at least 1/3 of the rise in energy prices over the past six years. Assuming that the pound had maintained its value, agsinst other currencies, at 2000–07 levels then energy prices in the UK would be at least 25% lower than their current level.

2. Data to support the above claims can be found on EUROSTATsite. Energy price inflation of the past six years in the UK has been very significantly in excess of the levels seen in Eurozone countries both collectively and individually. The data suggests that is not just the ~25% decline in the value of sterling that has been passed on to the consumer.

3. There is in addition the costs associated with sterling volatility. Utility companies may avail of a number of financial instruments to reduce exposure to sterling or international fuel prices but there is an enevitable cost associated with this strategy. Since the primary purpose of these financial instruments is to protect the profitability of the players involved the customer has to shoulder the cost. I would be surprised if sterling volatility is not contribution three to 5% of the final costs paid by the consumer.

4. As horrifying as the energy inflation statistics appear they do not fully convey the magnitude of the price increases being experience by low energy users (and one could expect real fuel poverty to be characterised by energy usage levels that are significantly lower than average). Although I don’t fall into the fuel poverty classification I have had to make significant reductions in my energy consumption in order to retain some control of my expenses. Having made such reductions in consumption I have found that the standing charge imposed by most suppliers represents as much as 50% of my project annual bill. Where a supplier does not impose a standing charge the unit price is significantly higher than rivals, those this option is still the most cost efficient for my needs. I have detailed the change in costs below, comparing my current charges with those I paid in 2004.

5. In 2004 gas was 1.2p/unit, now 5.06 electricity in 2004 as 6.0p/kWhr now 15.9p/kWhr. My own anecdotal evidence can be supported by an article in the Guardian of 19 Sept 2012 “Low users paying more for energy”.

6. While there is a cost associated with energy supply to individual properties, the magnitude of the fuel poverty issue suggests that if the Industry (including the regulator) and the Government were really interested in reducing fuel poverty, revenues generated by standing charges (or dual pricing schemes with the same effect) would be redistributed into a marginally higher charge per unit used.

7. Any additional benefit of such a policy would be to increase the level of price transparency for the individual customer. The unit price would mean “the unit price”.

8. My own preference is that the Utility companies should be required to state the Unit price on both bills and their adverting much in the same way that lenders have to display the %APR associated with a loan. It would be a requirement that any standing charge be fully reflected in the unit price and apply to from the very first unit.

9. With regard to possible complaints from high energy users who may have to pay fractionally higher charges (I would be surprised if any increase were greater than 5%) it should be remembered that with any scare commodity prices are supported in part by profligate use. The same high energy users are likely to find various energy saving measures more cost effective.

10. A focus of energy reduction on the most profligate user, has the potential to deliver much more significant reductions in energy saving which will have a beneficial effect (though admitidly small) on energy prices.

Fuel Poverty

1. Anyone who thinks that any progress has been made on fuel poverty over the past decade is deluding themselves. The exact opposite is the case. Even when we get figures on the number of people/households in fuel poverty they are hopelessy out of date since energy prices have in all likelihood risen in the period between research and publication. Additionally the drivers on energy price inflation point only in one direction. The combination of the BOE’s “Worthless Pound Policy” is likely to drive another round of price increases by the energy companies perhaps as early as the next few weeks.

2. In the absence of some intervention I would not be surprised to see in excess of 40% falling into the fuel poverty classification. I suspect that the figure would be closer to 50% if many had not responded to the successive wave of price rises by cutting consumption. My own response has been to reduce electricity consumption by in excess of 30% and more than halve my gas consumption.

3. Another driver for continued escalation of energy prices in the UK is the requirement to pay for new energy infrastructure.

4. If the proposed cost of the High Speed 2 (HS2) rail link are any indicator of energy infrastructure costs we could conceivably see a doubling of energy bills. Infrastructure costs in the UK appear to be completely out of line with that seen in other European counties. The latest stretch of the Spanish high speed rail network, from Madrid to Valencia, cost 6.6 Billion Euros (This equates to ~15 m euro per kilometer). The projected cost for HS2, which is of comparable distance to the Madrid Valencia, is £32 (Costs in excess of £95 million per mile)

5. Merely upgrading the west coast mainline cost more per mile than building new dedicated high speed lines in France.The west coast mainline upgrade cost £9 billion, £22 million per mile. The French build the TGVest (Paris to Strabourg) for 10 m euro per kilometer. Infrastructure projects are characterised by the long time scales associated with bringing the project to fruition and repayment of the capital involved in funding construction. Infrastructure projects will only be undertaken where profit is assured, and financial costs associated with guaranteeing profitability may be of the same magnitude as the actual construction costs. .

Barriers To Switching

1. One particular practice that is bound to have a very detrimental effect on poorer household is the delay in repayment of outstanding credit following a change in supplier. Rather than repayment via the direct debit mechanism that has been set up to pay the supplier, the market practice appear to be for the supplier to instruct the customers bank to close the direct debit and only begin to discuss repayment when/if the customer enquires about repayment. My own experience it that I am still awaiting repayment from my previous supplier over a year after switching (the outstanding credit being approximately equal to my annual bill) and a second outstanding credit balance more than five years after switching supplier.

2. One measure to tackle this practice would be for the utilities to return outstanding credit, following switching, based on uprating any repayment based on any change in prices in the intervening period.

February 2013

Prepared 26th July 2013