25 March 1998

Yvonne Constance, Chairman, Electricity Consumers' Committees Chairman's Group

Levies on Electricity

We are concerned about levies, about any levies, and the queue, and the list, and the requests, and the applications for levies we fear would see no end, once the principal objection is broken. Our position starts from this base.

We do know that people on lowest incomes spend disproportionate amounts of their available household money on heating. Household expenditure statistics tell us that those on low income spend 10% on heating, compared with 6% average or as little as 3 or 4% by the better off. Because lowest income customers spend disproportionately on heating, they also gain, of course, disproportionately from price reductions or drops in cost. And we see those customers as best served by market forces, that will deliver to all customers the lowest possible prices.

Out from our belief that that will happen, and there are plenty of examples of that to learn from experience in the gas market so far – and that is only 18 months old – we go further to say that we the smallest customers – those below 100 kilowatts – are paying an extortionate price. 560 million is being spent by the smallest customers to set up the market trading arrangement that will make this competitive supply and lowest price, to make it possible. Combined with paying for a market arrangement that is then not allowed, if you like, or is inhibited or that is restricted from delivering the benefit that should be due to it, is to be what we call a ‘lose-lose situation’ for those who are worst off.

For all customers, from April 1st, there is to be a reduction of an average of 6% on last year's tariffs, set up by the Regulator by way of offering a protected tariff for all customers as the market opens. We not only support that, we actually initiated it and made the case for it, on the basis that it is very important that all customers in electricity receive benefit from competition, whether they switch supplier or not. The effect of the maximum tariff, which as I say is to reduce by an average of 6%, would be cut in half by the imposition of say a 3% levy for fuel efficiency. The effect of say a 6% reduction in tariff this year would certainly be restricted and limited by the sharing, smearing of costs of pre-meters across all customers.

Our further objection to a levy for pre-payment meter customers rests on our observation that in electricity where there are pre-payment meter customers, about half of them are actually said to be, by Electricity Association figures – we don't have accurate figures on income – that half of them are in the ABC1 income bracket. In electricity pre-payment meterology has been promoted as the preferred payment option, it is not identified with the disadvantaged, it is not even identified with those in debt. It is the wrong focus for any kind of social levy, even if you were to make a case for social levy, the pre-payment meter customers would not be the right focus in our view. It is far too easy for it to wind up requiring a person who has never been in debt, never gone on a prepayment meter, never likely to choose one, subsidising a bunch of students sharing a flat who are on a prepayment meter because nobody could tie them down long enough to be sure that the debts get paid.

To go further, electricity is facing competition in supply, which in turn will drive competition in generation. And already we see that British Gas tariffs are indicated to offer 15% reductions in the price to customers as the competitive market opens. That compares directly in fact with what the Regulator has been able to squeeze and that has to do with the ability to negotiate with generators for a large customer base and to be big enough to walk away. If we are to see competition between generators we say that requires competition to be effective in the use of generation fuel. Which brings us to the same point in opposing any levy to support the coal industry, and we might even take the same view, though we are stuck with the levy, which the remains of the old non-fossil fuel levy of 1%, to support renewable sources of energy. The preferred route we have is that if the market opens it is possible, and two or three companies are already making it possible, for suppliers to offer a special tariff for energy generated from renewable fuel.

In short, our position is that the market is sufficiently well advanced, sufficiently close, sufficiently sure, to deliver results which help the lowest income customers, not to wish to see intervention at any level that will either inhibit that process, alter the balance between customer categories, and most of all impose burdens which have a disproportionate effect on the lowest end.

Special tariffs for green energy

The two electricity companies I'm aware of are Eastern, who started out saying they were selling something called green power, they now call it eco-power, and SWEB are looking at a green tariff. Most importantly, it is entirely taken up by those who choose to do it. I support it entirely. The DTI is taking it seriously enough to try to establish a renewable energy verification scheme, so that companies like Eastern for instance, who would be taking a premium on tariff for green energy, would be required to check in for the DTI verification scheme, to show what they are doing with it. And of course what they undertake to do with the premium collected is to direct it immediately and in said and certain quantity back to those who supply them from recognised renewable sources.

Of course is that it is not necessary to assume that your whole supply comes from that source. You would actually need security of supply, for instance, if you were running for wind power, because when the wind dies you would lose it; you could get none from solar, because when a cloud comes over you would get none. No, what this aims to do is simply take the premium and direct it to sources that ensure the company does purchase from renewable sources. And of course they have a very big chicken litter scheme in Eastern district. They don't own it, but they have an independent generator that burns chicken litter for instance, plus no doubt some wind power and so on. It will work, if customers are willing to pay the premium.

Green tax incentives

I am terribly happy to see any system that runs through taxation. Taxation does not worry us because it has to be absolutely transparent and it has to be negotiated in the House of Commons, and it doesn't alter the competitive pressures in the industry. But the levy system is about altering competitive pressures in the industry. It is a form of taxation, but it has a double whammy effect, if you like. First of all it does actually inhibit the competitive forces in the industry. If for instance you decide to support coal you are actually shoring up the market dominance of the three main generators. And the Government has to face that squarely. And in supporting the market dominance of the three main generators, you are denying the flow of competition that could produce prices as low as 20% below what we are currently paying.

What would you say to environmentalists who say that any reduction in price on fuels is going to bring about an increase in their use?

I would ask them for their evidence. When we saw an increase of 8% on the fuel bills for domestic customers when VAT was introduced, I am not aware that anybody could tell me that there was an 8% reduction, or any significant reduction, in consumption.

I don't think that we can curb the use of energy by means of taxation. I think we should conserve it. The energy efficiency lobbies have my support in terms of wishing to improve the insulation and the provision of energy saving measures in households, and particularly households in the private sector which I take to be the main problem, because nobody's focused on those in this country. I merely say it is the problem of the housing stock not the energy consumer. And I think to levy the energy consumer and make their position worse and alter both the competitive forces in the industry and the balance between customers is price not worth paying.

Corporation tax exemption on green energy

I do not think that taxation is a big inhibitor on the delivery of renewables. Although I do not deny that if the Government were to make up its mind on energy policy, to reduce the corporation tax on companies producing energy from renewable sources, they are perfectly entitled to do that. I would be most interested to see the effect. If that flowed through into a reduction in price from renewables, that would be great, because actually they tend to be very expensive

At the moment they are supported by what is still the tail end of the fossil fuel obligations, and they are supported in their capital structures by public subscription. Now we are not quarreling about the 1% that remains in place, simply because it is there, it has always been there, let sleeping dogs lie. But if you were to talk about increasing the opportunity for the renewables to compete, by alterations to the tax end of the system, I think we would be delighted to see it.

But I don't think renewables would be able to supply very much. However, we are looking for any competitors we can find to the big three, any!

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