Dr michael pollitt

Energy sapping

19 July 2011

The article at a glance

‘The Electricity Market Reform’ or EMR may place too much regulation onto the energy industry and it’s the consumer who will end …

Dr Michael Pollitt‘The Electricity Market Reform’ or EMR may place too much regulation onto the energy industry and it’s the consumer who will end up paying

Dr Michael Pollitt, an Assistant Director of the Electricity Policy Research Group at Cambridge Judge Business School, says the ‘squeezed middle’ will be doubly squeezed in the future paying more for their energy bills and helping to prop up greater fuel subsidies from the government to those who can’t pay.

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The double whammy of higher fuel bills and more industry regulations and subsidies to the poor will hit those ‘squeezed middle’ most he warns:

“The experience the world over is that governments are under pressure to subsidise energy for the poor and what is likely to happen in the UK is that governments will have to give a large number of poor households direct help with their bills, or income supplements, or they will be given some sort of targeted intervention to help them save energy.

“But many of the costs of paying for those measures will be lumped onto the rest of energy consumers, so it will probably be the people in the ‘squeezed middle’ who will end up having to pay higher bills and to subsidise other people and that will be potentially quite significant for them.”

Dr Pollitt has just co-authored a new report ‘The implications of recent UK energy policy for the consumer: a report for the Consumers’ Association’ with Laura Platchkov and Irina Shaorshadze. His comments come in the week the government has issued a new White Paper on the EMR ‘The Electricity Market Reform’ and new government figures show more than five million households in Britain spent over 10 per cent of their total income on energy bills in 2009 and the consumer energy group focus warns worse is to come.

Dr Pollitt said he feared ‘The Electricity Market Reform’ or EMR may place too much regulation onto the energy industry:

“Essentially what the EMR is trying to do is to incentivise a particular set of investments that the Government wants to encourage and the question for consumers is whether it is the best way forward. The Government is promoting more renewables to help us to hit our EU renewables targets and it’s also concerned about promoting nuclear power and carbon capture and storage.

“But the concern is that if we have policies that promote particular types of investment and choose the mix of generation, it may turn out to be very expensive. We need to see how energy prices develop. For instance, if gas is relatively cheap we may want more of it, and we also need to make sure that in incentivising other types of low carbon investment we do that at least cost. That means not setting our hearts on particular investments, but letting the market decide. We should not lock ourselves into a set of very expensive investments that may turn out to be a mistake with hindsight.”

Dr Pollitt also said the UK was highly unlikely to meet our target of 15 per cent of final energy consumption from renewables in 2020: “Our targets for 2020 are 15 per cent renewable energy – that probably implies possibly up to 40 per cent of our electricity from renewables. We are clearly way behind the curve and nobody thinks we are going to hit our 2020 target. It was always an unrealistic target and that continues to be the case.”

He went on to say that companies would struggle with the regulations too: “Companies are getting worried about the degree of government involvement in electricity generation in setting the incentives and in essentially choosing investments. This is beginning to feel like a move back to a centrally planned electricity system.”

But there is good news too, Dr Pollitt says gas prices might fall if more of our gas comes from unconventional sources, such as ‘shale’ gas.

“The number of people in fuel poverty, that is those spending 10 per cent or more of their income on household fuel, has increased and is back up to levels we have not seen since the 1990s. It is a problem and although Britain doesn’t have the worst fuel poverty problems in Europe, it is something we have to adjust to.

“There is increasing demand for energy around the world, particularly coming from the Far East. But there may be the prospect of increased new discoveries of fossil fuels, particularly the discovery of these unconventional gas sources allowing us to get more gas out than we thought possible before. There is also the prospect of more difficult to extract oil from the Arctic, and from tar sands in Canada. We need to look at how these two curves compare to each other, if demand moderates and we continue to have discoveries, particularly of unconventional gas, maybe prices will soften.”