Dr. Matthew Trewhella, CEO of The Kensa Group
On 12th September I wrote a letter to the new Prime Minister calling for a shift in gas and electricity levels to incentivise better long-term energy security.
The letter outlined how we welcomed the significant intervention on energy prices being capped at £2500 per average household for the next two years and how this quick intervention to help consumers is the right thing to do. The previously forecast bills would have left far too many people with impossible financial decisions.
However, we at Kensa believe this also presents a unique opportunity to protect consumers against falling into fuel poverty and allow them to make alternative choices about their energy provision that will enable them to protect themselves against future energy crises. These choices will improve the nation’s energy security, reduce reliance on exposure to foreign markets and provide progress towards our net zero ambitions.
One policy mechanism that would enact this change would be to use the price cap calculation methodology to rebalance gas and electricity prices in line with key commitment 5[i] of the heat and buildings strategy. Adding just 2p/kWh (19.4%) to the price of gas would result in capped prices of 12.3p/kWh and 26.0p/kWh for gas and electricity rather than the 10.3p/kWh and 34.0p/kWh in the current calculation[ii]. This would result in lower unit electricity prices while retaining the £2500 overall cap figure[iii]. This is a non-trivial change but so is spending £150 billion of taxpayer money in a market intervention.
Currently, due to the relative prices of gas and electricity, consumers are not incentivised to use the electricity we can make in this country – and plan to export to others – over the fossil fuels we are importing from abroad at increasingly expensive rates. If the energy price cap was to constrain electricity prices more than gas prices, this would change consumer’s long-term behaviour while still protecting them in the short term.
Interventions to the level that the Dutch Government have enacted (where gas and electricity are approaching the same price per unit), would be too much for the UK market in one step but moves in that direction would ensure that the significant and expensive intervention that has been announced drives as many of our long-term policy ambitions as possible including those on energy security and the climate.
If you support our messages, please do contact us to help us deliver this message to the government.
[i] Heat and Buildings Strategy key commitment 5 states: “Clean, cheap electricity is an everyday essential. We have seen the impact of overreliance on gas pushing up prices for hardworking people but our plan to expand our domestic renewables will push down electricity wholesale prices. However, current pricing of electricity and gas does not incentivise consumers to make green choices, such as switching from gas boilers to electric heat pumps.”
[ii] Current Calculation
| Annual Consumption | Price per unit | Standing Charge | Annual Cost | |
|---|---|---|---|---|
| Gas | 1200 | 10.3 | 28.0 | £1,338.20 |
| Electricity | 3100 | 34.0 | 46.0 | £1,221.90 |
| Total | 15100 | £2,560.10 | ||
| Heat Pump Annual Saving | £115 | |||
Proposed Calculation
| Annual Consumption | Price per unit | Standing Charge | Annual cost | |
|---|---|---|---|---|
| Gas | 12000 | 12.3 | 28.0 | £1,578.20 |
| Electricity | 3100 | 26.3 | 46.0 | £982.58 |
| Total | 15100 | £2,560.78 | ||
| Heat Pump Annual Saving: | £691 |
[iii] This also further supports the 1.4 million households in the UK with direct electric heating and no gas bill, those who will continue to be the most fuel poor this winter.
