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Carbon Brief Staff

Carbon Brief Staff

13.11.2013 | 2:33pm
ScienceLow income households hit hardest by future energy bill increases, government watchdog warns
SCIENCE | November 13. 2013. 14:33
Low income households hit hardest by future energy bill increases, government watchdog warns

New analysis by government watchdog, the National Audit Office (NAO), suggests recent energy price rises are part of a longer term trend.

A report from the NAO says consumers can expect above-inflation energy bills rises for another 17 years.

It blames most of the cost increase on the need to upgrade the UK’s ageing energy infrastructure. The NAO says the government plans to attract £310 billion of infrastructure investment in the coming decades, £110 billion of which is for energy projects. Consumers are ultimately going to foot the bill, it warns – with lower income households feeling the impact the most.

Bills above inflation

Since 2002, household bills have been rising quicker than a household’s income level, and that trend is set to continue.

The cost of energy is the biggest single cause. While average income rose six per cent between 2002 and 2009 energy costs rose 44 per cent over the same period.

Today, households are spending a much greater proportion of their incomes on energy than they were a decade ago.

NOA line chart

The NAO’s analysis is based on figures from market regulator, Ofgem, and the Treasury.

The Treasury says the government plans to oversee 550 infrastructure upgrade projects – from improving gas storage facilities, to rolling out broadband internet nationwide – over the next decade.

Their analysis also shows that many government policies are funded through levies on household bills rather than taxation.

The NAO says about a third of the UK’s infrastructure upgrades – including to the energy, water, and telecommunications networks – will be paid for through tax. The cost of the other two-thirds will be paid through energy bills, it says.

And that means bills continuing to rise in absolute terms and as a proportion of household income.

Energy investment

The Department of Energy and Climate Change says £110 billion of investment is needed to replace the UK’s ageing power plants, and upgrading the electricity and gas networks, over the next decade and beyond.

The NAO takes Ofgem’s breakdown of household bills, and identifies what it calls “Cost influenced by infrastructure investment” – the region outlined in thick black lines in the chart below.

NOA pie chart

The NAO tells us that the way Ofgem’s analysis is structured means it’s hard “to make a hard and fast distinction” between how much of a household bill goes towards infrastructure costs, and how much goes to covering other costs (such as buying fuel on the wholesale market).

The NAO report serves as a reminder that the government’s infrastructural investment decisions do affect household bills – albeit in the longer term.

While recent energy discussions have focused on short-term costs – changes in wholesale prices and relatively short-lived policies – the government needs to ensure it understands how its its energy policy will affect household budgets in the long run, the NAO says.

Not set in stone

The NAO’s analysis highlights that rising energy costs will affect households differently depending on their incomes.

If household incomes don’t rise with inflation, the extra strain of paying bills will become much greater, the NAO points out.

Likewise, lower income households spend a much larger portion of their budget on paying bills than higher income households. While the top 10 per cent of earners spend around 3.5 per cent on the cost of energy in 2011, the lowest income 10 per cent spent nearly 10 per cent, the NAO says.

NAO income bar chart cropped

Households are going to continue to pay increasing amounts for energy over the coming years, but the burden isn’t spread evenly across society.

Bills or tax

The government maintains that the UK’s energy infrastructure is in desperate need of upgrading due to decades of neglect. If those upgrades are going to go ahead, the public is ultimately going to have to pay for them.

But how? The recent furore surrounding energy company price increases has led to government discussions over whether to move some of the costs of paying for energy system improvements off household bills and onto tax.

That could lower bills and help lower income households in the short-term.

But even if the government shuffles the cost of infrastructure upgrades from bills and onto tax, the NAO analysis suggests that it will still have an impact on consumers – it just won’t be announced by a utility bill clunking through the letterbox.

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