Most people assume the main reason energy bills are rising is the greed of energy companies who must be jacking up prices to boost their profits. They have been encouraged to believe this by those who wish to divert attention away from the impact of Green taxes on energy bills. If only it were true that rising prices were the cause of rising bills. The solution would be simple: force the energy companies to cut tariffs by regulation or competition until profits come back to the level necessary to reward and encourage investment. Unfortunately the All Party Select Committee on Energy and Climate Change found no evidence that companies have been artificially raising prices and profits. Indeed, the average profit margin – including profits on generation – was 7.6% of the final tariff. By no stretch of the imagination could that account for the 40% increase in tariffs over recent years.
Of course we should nonetheless encourage the maximum competition between suppliers since that will stimulate them to constantly reduce costs within their control.
The main reason energy costs have been rising until recently has been the rising price of gas. We import most of our gas so the price is set in world markets. It in turn determines the cost of electricity since gas turbines are the marginal source of power. The government and environmentalists assume the cost of gas will go on rising. This assumption enables them to project that gas powered generation will eventually be more expensive than renewables. I spent two decades forecasting energy prices and I learnt three things. First, it is very difficult to get right. Second prices go down as well as up. Third, gluts and low prices, though rarely foreseen tend to last longer than shortages and rising prices. And fourth, the only certain indicator of a price fall is when everyone assumes prices can only go up. As they do now! Yet gas prices have tumbled in the US as a result of the shale gas revolution. Shales are widespread across the globe. It is inconceivable that fracking will not be successful in other countries.
The most important thing the UK government can do, therefore, is to encourage drilling for shale gas as speedily as possible. Opposition to it is driven by eco-warriors who want to leave all fossil fuels in the ground. Having been unable to convince us of that case they resort to scaremongering tactics. In fact, 200 wells have used fracking in the UK and 2 million worldwide – yet not a single person has been poisoned by contaminated water nor a single building damaged by earth ‘quakes’ which are actually tremors equivalent to a lorry going over a bump in the road! If drilling is successful in the UK it will either bring down prices or, if prices remain set by the European market, it will generate massive tax revenues enabling us to cut other taxes and household costs.
Failing that the main factor driving up energy bills from now on will be the cost of switching to renewables as required by the Climate Change Act and EU Directives. The least costly renewable is onshore wind which is twice as expensive as fossil fuels – even excluding the cost of backup generators needed for when the wind does not blow and the cost of transmission cables from remote sites. Offshore wind is three times as expensive. So they are bound to have an increasing impact on bills. The best thing the government can do is to call a halt to the deployment of these costly immature technologies and wait until their costs have come down below the cost of fossil fuels as the greens constantly assert they will.