British Gas owner Centrica’s announcement of £992 million profit for the first half of 2008 only a day after putting up gas prices by an eye-watering 35% has caused predictable howls of outrage and calls for a windfall tax from left and left-leaning politicians.
This would be a mistake. In fact only 17% of the profit is due to retailing residential gas with the vast majority coming from ‘upstream’ – i.e. producing gas from fields in Morecambe Bay and the North Sea – even though this is a relatively small part of the business. British Gas is not allowed by law to subsidise its residential sales from upstream profits even if it wanted to for fear this would give them an unfair advantage in the market. In the medium and long run it is far more important that they and others like them have the incentive to invest in additional energy supplies (especially renewables) that will eventually bring prices down again.
As has been observed often before, the cure for high prices is high prices.
But there is also a political issue. The implication of a windfall tax is that the Government can redistribute it to those in fuel poverty. This sounds perfectly fine but unfortunately it doesn’t work. Energywatch recently said that social tariffs reach only 1 in 15 of the most vulnerable households. And that’s before factoring in the huge bureaucratic cost involved which the country can ill-afford.
Socialist solutions sound great but unravel when you look more closely.
However, I am very uncomfortable with the whopping £144 per annum extra paid by those on pre-payment meters compared with the relatively affluent on direct debit. This is the result of a paradigm that says each of us should have maximum choice in each and every area of our lives. But why? As it happens I have just fixed our own household energy prices well ahead at the old price so I am able to be perfectly relaxed about the coming winter, but for every winner there will be several losers. Moreover, the multiplicity of deals on offer from the energy companies makes the market quite remarkably opaque. A good system would be one accessible to all in society and not just those with more money and/or education.
It is no surprise that society is getting more unequal under Labour.
As an alternative, why not require the energy companies to have just a single transparent tariff for all residential and small business customers (except perhaps insofar as they could demonstrate a genuine difference in the cost of supplying that customer – i.e. a set amount for the additional cost of a pre-payment meter). ‘Choice’ would be reduced but transparency and fairness would increase dramatically, the energy companies would save a bundle on sales and marketing (and I for one would be delighted to see no more of their salesmen!!) and there would also be multi-million pound savings from not having to pay off comparison websites (I understand that each switch nets them circa £40 so their interest in promoting ‘churn’ is understandable) which would find its way back to the customer in lower prices.
And finally, with ministers and senior civil servants in the same boat as ordinary people it might just concentrate minds that need to be concentrated on, for example, why energy prices are now so much higher here than in Europe even though we have more domestic supply than almost any other EU member.