9 Apr 2014 11:37am

Economics of energy reform

Following the RBS/NatWest SME energy roundtable debate earlier in the year, we talk to Caroline Flint, shadow secretary of state for energy and climate change, about what policy changes would most benefit businesses of all sizes

What are the energy challenges facing SMEs and what would make things better for business?

For many businesses energy bills are now their second or third biggest cost, after labour and business rates. So making bills more competitive would be a huge benefit to all, from the smallest micro-businesses to the biggest industrial and commercial users. In a lot of ways, non-domestic energy users, particularly small businesses, are worse off than households.

Households have a range of rights and protections in the energy market that businesses don’t. One thing we’d do is ban energy companies from offering unfair contracts and rolling small businesses over on to more expensive tariffs without their consent. We would also change the rules on back-billing, so that small businesses could only be back-billed for one year, and not subjected to six years of crippling back-billing, which can run into tens of thousands of pounds. We’d also put rules in place to require suppliers to take into account the ability of small businesses to pay debts, and come up with a realistic repayment plan.

Is the UK energy market fundamentally flawed?

There are serious structural flaws with the way in which the market works. It is characterised by consistently poor levels of service – particularly from the big six suppliers – uncompetitive prices, high and rising profits, low levels of consumer engagement and trust, and a market dominated by six firms, all of which inherited customers from when they were monopoly suppliers. The market has failed to deliver anything like the investment we need in generation.

What can be done to make markets more efficient?

A free market only works when there are proper rules to ensure fair play and competition. Prices and profits should be set by a properly functioning market, but it’s government’s responsibility to ensure the market is working in a competitive way. Our proposals, such as a ring-fence between the generation and retail arms within integrated energy companies (requiring them to trade power via an open pool or exchange), a ban on self-supply and an open marketplace should make this market more competitive, liquid and transparent.

Research by NatWest/RBS shows that 96% of small businesses are still on the standard tariff. Can government action discourage this inertia?

Lots of small businesses have had poor experiences with energy suppliers and have completely lost trust. Because of mis-selling, even when people have switched in some cases they’ve ended up paying more. There have been some collective switches organised, which have helped engage customers who have never switched before. But one of the best ways to encourage competition is by reforming the market to let new entrants compete. Most small businesses are still supplied by the big six. We really need to open up the market so that small suppliers and new entrants can come in and offer lower prices, better deals and more innovative products.

How about encouraging greater energy efficiency?

Energy efficiency isn’t just something for households; it should be a business priority, too. In retail, for example, electricity bills are the second biggest cost after staff. Where food and drink is sold, refrigeration accounts for 40% of electricity bills. Fitting doors on fridges reduces this by half. In 2012, the Co-op supermarket began installing fridge doors to all its stores. The cost is immediately offset by a smaller motor needed to pump refrigerants. It’s cost neutral before the first bill arrives. The new motors also break down less, so maintenance costs are lower and less stock is lost. Every month, the Co-op saves 20% on bills. As a result in 2012, while energy prices were rising, Co-op saved £50m.

Which renewables projects would you prioritise?

In some ways Britain is uniquely blessed with renewable energy potential. We’re the windiest country in Europe, the world leader in offshore wind, and nowhere has better marine energy potential. We might not be the sunniest country, but solar has seen dramatic cost reductions in the last decade and in some parts of the world is getting close to grid parity. Those are developments that should be properly supported. But alongside these, we should also be supporting new nuclear build in Britain and carbon capture and storage, both of which are essential parts of a strategy to decarbonise our power supply.

Would you prioritise large-scale national developments or smaller, local projects?

This is a false dichotomy. With a quarter of our power stations closing in the next decade, we need to invest in new sources of secure baseload generation. But one of the most exciting things about renewable energy is that individuals and communities can generate their own power. Last year I visited Germany to observe their energy transition. It hasn’t been without problems, but today Germany has 1.3 million generators of electricity, and individuals own seven times as much renewable energy capacity compared with the big four utilities. The lesson I took was that building community ownership built acceptance.

What are the greatest energy challenges facing the UK?

Clearly, to rebuild and re-engineer almost our entire energy infrastructure in the next few decades, in order to make it cleaner, more secure and affordable is a huge, almost unprecedented, undertaking.

How would you address this challenge?

Some people say it’s not possible to achieve security, affordability and reductions in carbon emissions. They say we have to slow down investment in clean energy and delay decarbonisation or we have to accept that the gap between bills and what users can afford will keep rising. I disagree.

Decarbonisation will lead to lower, not higher bills. Of course, gas is a vital part of our energy mix, and will be for years to come – not just for electricity generation, but for heating homes and businesses. That’s why, provided it’s economically and environmentally viable, we support shale exploration. But if we rely on gas, most experts think bills will be higher than investing in clean energy. The Committee on Climate Change says a gas-based system would see bills £600 higher in 2050 than under decarbonisation. There are short-term investment costs, but with a quarter of power stations closing this decade, there will be costs whatever we do.


RBS/NatWest comment

Ian Burrow, head of agriculture and renewable energy for business and commercial banking, NatWest

“It’s great to see that there is so much enthusiasm and activity from both the business and political world around the issue of energy and sustainability. There are plenty of opportunities for businesses to look at their energy use, but it’s clear there is still a lot of work to do on educating them on the issues and options.

In a survey of over 600 UK businesses we undertook last year, I was shocked that 96% were on a standard tariff. Although this may be the best option for some, it’s not for everyone and businesses could make an instant saving by investigating their best option.

Following our research, we launched a nationwide energy audit service with business consultants Mentor. The audits help businesses identify potential savings and even look at whether they could start generating their own energy through renewable sources. In a pilot of over 60 businesses with an annual energy spend of between £10,000 and £200,000 the audits identified an average potential saving of £27,000 a year – a significant chunk of change for any business. Since the launch of our energy audits, we have seen a number of business wanting to undergo such an energy audit.

We’re committed to continuing our work with businesses on establishing long and short-term savings and as a result helping them become more sustainable and environmentally friendly.”

For more on the energy debate visit nw-businesssense.com/energy

See all the articles in the Business Sense series


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