Must energy poverty exist?
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.
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.
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.
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?
- 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.
- 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.
Here are the unit prices and total pre-VAT costs of the progressive pricing scheme: