Making energy affordable in the UK

Must energy poverty exist?

No

Then why does it exist?

Firstly, because low incomes are insufficient to cover household basic energy costs (cooking, heating, hot water, etc).

Secondly, many energy suppliers charge a higher unit cost at the lowest levels of consumption than they charge at higher levels of consumption. This penalises low energy users, which are most likely to be poor households. It also runs counter to the nation’s environmental goal, which is to discourage high energy consumption

So what can be done?

A first action could be to scrap the regressive high unit costs that penalise low energy users. In tandem, any standing charges that some energy suppliers may currently charge or seek to charge as a replacement should be abolished.

Secondly, a progressive pricing formula could be introduced.

A progressive pricing formula? Can you explain?

Yes.  A progressive pricing formula would charge units of energy to a customer according  to the customer’s energy consumption. The higher the customer’s quarterly consumption, then the more that customer would be charged per unit consumed.

Really? How so?

The price per unit to be charged to a customer could be determined by the following simple formula:

£1 x quarterly units consumed / n

where n is chosen to suit. The higher the value of n, the more generous will be the scheme.

For the purposes of this exposition I have chosen n to be 5,000 and so will be using

£1 x quarterly units consumed / 5000

to illustrate how a progressive energy pricing scheme would work.

Example

With n set to 5000, a customer consuming 50 units in a quarter would be charged £0.01 per unit, or £0.50 in total. The low unit charge reflects the customer’s very low quarterly consumption .

A customer consuming 2,000 units in a quarter would be charged £0.40 per unit, or £800 in total.

Here is a graph of quarterly charges using the chosen denominator value within a progressive scheme for a range of consumption quantities.

Energy graph 1

Note how the quarterly charges follow a curve, This indicates the progressive nature of the pricing formula, that is, higher consumption results in higher unit charges.

How would this help?

Such a pricing policy would significantly reduce the energy bills of careful,  low income households (eg, pensioners, low-waged, un-waged).

In contrast, profligate users of energy would incur significantly higher energy costs. Their energy costs would rise progressively with their profligacy.

Here is a graph that compares the quarterly energy cost under the exemplary progressive scheme with a scheme that uses a flat rate charge of £0.20 per unit for all levels of quarterly consumption.

Energy graph.png

What does the graph show?

The straight line represents the constant rate pricing scheme of £0.20 per unit. In other words, the total quarterly cost increases at a constant rate of £0.20 per unit as quarterly consumption increases.

In contrast, the curve represents the progressive pricing scheme where the unit cost increases as quarterly consumption increases.

At quarterly consumption levels of below 1,000 units, the total costs of the progressive scheme are below the total costs of the constant rate scheme. At  a consumption level of 1,000 units the total quarterly costs of both schemes are equal. Beyond 1,000 units, the total quarterly costs of the progressive pricing scheme are higher than those of the constant price scheme.

Who would benefit from a progressive scheme?

  1. Low income households whose energy budgets will be much tighter than those of wealthier households. Their energy consumption will be low and hence they will benefit from the low unit costs.
  2. The environment because the higher unit costs at high levels of energy consumption  would provide an incentive for high using consumers to reduce profligacy or to otherwise reduce their consumption.

Can the energy suppliers be compelled to adopt progressive pricing?

In their current private status, it is unclear whether the regulator or an Act of Parliament could compel them. However, there remains the feasible, low-cost option of re-nationalising the energy suppliers.  A government in charge of state owned energy suppliers could direct them to adopt a progressive pricing policy.

Appendix

Here are the unit prices and total pre-VAT costs of the progressive pricing scheme:

Energy table

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2 comments

  1. This is an interesting proposal, but I’m not convinced it would be an effective way to redistribute from wealthy to poor or to help the environment.

    You say “This penalises low energy users, which are most likely to be poor households.” Do you have any evidence on this? I wonder if the correlation is not as straightforward – some poor people presumably live in large and drafty houses for example if they are elderly or have a lot of children (though you might think that the former should consider moving to a more appropriate dwelling and the latter chose to have the number of children they did so don’t really deserve further support from everyone else).

  2. Hi Doug

    No, I don’t have statistical evidence that establishes a significant correlation between low energy use and poverty. On that point, I concede my proposal is based on supposition; and is in response to media reports concerning fuel poverty and the choice between heating and eating that many households must make.

    Yes, there may be poor households with a lot of children whose energy use may not fall below the 2nd graph’s “break even point. However, despite this, the proposed scheme still offers such households the opportunity of cutting their costs through energy saving measures. The scheme could well empower them to a greater extent than the existing pricing formulae do. Also, the additional energy costs associated with children would be met, at least in part, by child benefit

    OAPs living in large drafty houses could, at least in the cold months, restrict their living quarters to a smaller part of the house and restrict the heating to that part of the house. This way, such households could choose to opt in as beneficiaries of the scheme. I don’t say this is ideal, but if it helps the elderly to keep warm in the cold months and to avoid the choice between heating or eating, then it is to be preferred.

    Of course, some wealthy households may choose to opt in to the benefits of the scheme by drastically reducing their energy consumption. Although I think this is unlikely, such behaviour should be welcomed as it contributes towards a reduction in the nation’s energy consumption and the nation’s need for investment in increased generating capacity.


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