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Mail story on energy price rises ignores the role of spiralling wholesale fuel costs

  • 12 Oct 2011, 17:00
  • Robin Webster

Press coverage of energy bills and why they are rising has gone a bit quiet over the last few weeks, but today the Daily Mail leapt back into the fray with a page two headline - " Green taxes could force one in four into fuel poverty" - followed up by the now-familiar supportive editorial protesting against the impact of "cripping green levies" on hard-working families.

The article is based on a DeutscheBank report released on Monday, entitled "UK Energy Bills: back to the 1970s". The 55-page report appears to have been written for prospective investors in the energy companies SSE and Centrica, and gives advice about how energy prices, politics and policy are likely to impact on profits. The big six energy companies are under scrutiny from regulators and politicians. The report is in large part focused upon the fact that wholesale prices, not an absence of competition between the energy suppliers, is to blame for rising prices.

As already reported by Reuters and Channel 4 earlier this week, the report suggests that a quarter of UK homes could be in fuel poverty by 2015 as a result of price rises in energy bills, and reduced household incomes due to the current economic downturn. 'Fuel poverty' is defined as spending more than a tenth of their household disposable income on energy costs (full definition here).

This is a pretty shocking figure, and as the Channel 4 blog also reported, DeutscheBank hold green measures partially responsible. A closer reading of the report however - and indeed a quick glance at the other press cuttings - indicate that the Mail has simply ignored a major part of the Deutsche Bank analysis which doesn't appear to fit with their narrative.

Here's the Mail's framing. The first line of the Mail article is:

One in four households will be driven into fuel poverty if the Government pursues controversial green energy targets, ministers have been warned.

This is a very selective presentation of the report's findings. In fact the report found - and states clearly in the summary - that it is both the rising price of fossil fuels and measures designed to encourage decarbonisation which will push up bills.

On fossil fuel costs, for example, DeutscheBank note that "In the late 1980's and 1990's the UK was for the most part an energy exporter rather than a net importer" but that

In recent years the UK has once again become a nation dependent on imported fuel...our import dependence is rising to levels seen in the early 1970's once again. This makes it much harder for UK government policies to shield consumers from exposure to international fossil fuel prices.

And later

Fundamental analysis of gas supply and demand by our Commodities Research team indicates that the surplus of gas in Europe is likely to be eliminated by 2013, with a re- convergence to oil-linked prices by 2014 ... higher European prices will not be undermined by exports from North America or by unconventional gas in Europe …This implies UK gas prices roughly doubling from 2009/10 levels by 2014...Although there is a mix of fuel use in the UK generation market, most generation at the margin is gas-fired. This means that increases in gas generation costs are reflected in increases in the UK power price. [our emphasis]

In other words, they conclude that a significant proportion of the predicted energy bill price rises will occur as a result of the rising price of gas.

On the costs of green measures, the report suggests that the carbon price floor (expected to be introduced in 2013) and measures designed to encourage increased uptake of renewable energy over the next decade will have an effect of raising electricity bills.

DECC have argued that increased energy efficiency measures will largely counterbalance green costs, but like the Prime Minister's adviser Ben Moxham, DeutscheBank is "somewhat skeptical" of the Government's proposed measures, pointing out of the Green Deal loan programme (intended to allow private firms the chance to offer consumers energy efficiency improvements, which are then paid back through installed payments):

Even if energy use does drop through the Green Deal, this will not in the short term necessarily reduce people's energy bills. It may merely change a proportion of the bill from paying for energy to paying back a loan. Only once the capital spend is fully paid off will the reduced energy use translate into a more material reduction in people's bills.

The report examines "Abandoning the green agenda" as one of two proposed methods for mitigating the price rise in energy bills - one which the author of the report told Channel 4 could "cut 15 percent from bills by 2015".

What this might do to bills in the long-term is a question that seems to remain unanswered. Energy academic Rob Gross told the Mail:

"Cutting support for renewables would slow down the UK's progress in reducing dependency on imported fossil fuels"

It's worth bearing in mind that this report has been written for investors in two energy companies - Centrica and SSE - and so its message is built around how to maintain power company profits in the context of rising bills and economic hardship.

The cost of energy bills is a live political issue which means that this report is likely to be cited in the future. The kind of selective presentation that the Mail have given it is unhelpful, though, and we hope others using the report in their work will be more responsible.

UPDATE A few minor edits were made to this blog at 5.45pm on 12th Oct following some comments which we received a bit late.

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