APRIL 1 is typically a day for humour, but not many in Scotland were laughing when Ofgem, the UK’s energy regulator, announced that the price cap for household heating would be rising by 54% on that day, in effect ushering in the largest ever one-off increase in heating bills.
It was no practical joke, but has Ofgem taken us for fools? The regulator said the rise was necessary because “energy companies cannot afford to supply electricity and gas to their customers for less than they have paid for it”, and that “under the price cap, energy companies can only charge a fair price”. This raises as many questions as it does answers.
That electricity and gas prices are on the rise internationally is without question, but Scotland is a country where almost two-thirds of the country’s energy comes from renewables; shouldn’t that at least dampen the effect of high prices in international markets? Furthermore, are the “big six” energy firms really taking their share of the load of rising costs? And finally, is the price rise as “fair” as Ofgem claims?
It’s expensive to be poor
PRE-PAY energy meters are a good example of why it can be expensive to be poor. No one would choose to have to go to the shop to keep topping up their heating if they could comfortably afford to avoid it, given the inconvenience and stress it causes. Yet the cost of heating is actually more expensive for people with pre-pay meters than those who pay by direct debit, and Ofgem’s April 1 price hike has made that disparity even greater.
The price cap for pre-pay meters has gone up by £708 per annum, from £1309 to £2017, while direct debit has gone up by £693, to £1971. That means those on pre-pay are paying nearly £60 a month more than they were before April, and nearly £50 more per year than those on direct debit.
Some of those on pre-pay meters cannot switch because it requires a credit check to do so. What’s “fair” about that?
Chris Mitchell, GMB union convener for cleansing workers in Glasgow, is one of those on a pre-pay meter, and tells The National the price hike is “shocking”.
“I need to go down to the shop to top up my key meter every couple of days, and I’ve seen a massive difference in my gas and electricity,” he says. “It’s risen dramatically. Myself and my wife, we have three kids, and we’re having to cut back on a lot of things.”
Mitchell says he’s been in situations in the past where he has had no money to top-up the meter and “everything shuts off right away: your electricity, your fridge, and that causes chaos in itself because things start to melt or go off”.
Thankfully, he’s not in that position now, but knows many cleansing workers in the city who are facing impossible financial decisions.
“The scenario many people are in is ‘it’s heat or eat’,” he says. “That’s just the facts of the situation.
“The amount of people that I’ve seen that are going to be under-nourished because they are eating the cheapest meals you can get. I’ve seen people going to shops they never went to in the past, looking for deals, some guys even eating just one meal a day.
“Cleansing work is a physical, manual handling task – they need nutrition. My fear is that the cost-of-living crisis is really having a detrimental effect on their health.”
The Scottish Government once had a target of eliminating fuel poverty – defined as households which are spending more than 10% of their income on heating – by 2020. Far from it being eliminated, research by Energy Action Scotland has found that a further 211,000 households are in fuel poverty following Ofgem’s price cap hike. Some 43% more households are in fuel poverty now than in 2019.
Both the UK and Scottish governments responded to Ofgem’s announcement by introducing a £150 rebate for those in council taxes A to D. The Scottish Government has also announced an expansion of the Home Energy Scotland advice service and a widening of the Warmer Homes Scotland fuel poverty programme to include more groups within the 60-75 years age-range.
According to Frazer Scott, Energy Action Scotland chief executive, measures at both Holyrood and Westminster “go nowhere near far enough”. He has called for a windfall tax on oil and gas giants and to cut VAT on energy bills.
Certainly, oil and gas firms, including many operating in the North Sea, are rolling in cash, with those on the S&P 500 stock market seeing a 250% growth in their earnings-per-share for the first quarter of 2022. The next best industry sector saw growth well under 50%. BP’s chief financial officer, Murray Auchincloss, even let slip in an earnings call that “it’s possible that we’re getting more cash than we know what to do with”.
However, a windfall tax on oil and gas would require UK Government action as it is a “reserved” power, and despite BP and co rolling in cash, it does not look like the Tories are going to budget. Business minister Kwasi Kwarteng has erroneously claimed such a tax would “destroy investment”.
The really bad news is that things could still get even worse. The next Ofgem price cap setting is in October, just as the cold weather begins to bite and radiators are cranked up in homes across Scotland. The Office for Budget Responsibility expects prices to rise in October by £830 – an even greater rise than in April.
Even Kevin Anderson, chief executive of Scottish Power, told a UK Parliament Select Committee that “by October”, with the possibility of tens of thousands of households freezing but in fear of turning on the radiator, the situation will become “horrific”.
For Mitchell, who led cleansing workers in a major strike in Glasgow last year, if government inaction continues, it must be met with a collective response from workers.
“Rising fuel poverty is going to have a detrimental effect right across the working class,” he says. “I would call a general strike to be honest with you, because we can’t continue like this.”
Why are prices so high?
SCOTLAND’S energy generation is almost entirely domestic, and 60% of that generation comes from green energy sources. Once installed, renewables have a fuel cost which is effectively zero. That’s why Norway, where 93% of their household heating comes from hydroelectric, has the cheapest energy bills in Europe. So what explains Scotland’s susceptibility to the surge in gas prices on international markets?
Gordon Morgan, a freelance researcher specialising in energy, says that the difference between Norway and Scotland can be found in “the design of the UK’s energy market”.
First, the wholesale price is determined not by the average price of all forms of energy generation but by the last unit of energy required to meet peak energy demand, which in Britain is usually gas.
Morgan says that “the failure to reduce demand for heating through insulation and establish significant renewable energy storage capacity” is now “costing households in high prices”.
Secondly, the UK’s electricity grid is centralised around London and the South East as it was designed for a fossil-fuel era when the closer energy was to big population centres, the cheaper it was to deliver. That design means if you want to connect a wind farm to the grid in the Highlands it will cost money, but to do the same in Devon would see the energy provider given a subsidy.
“If Scotland were a separate market, then given we produce enough renewables to meet demand here, most of the time electricity prices would be lower,” Morgan, who has co-authored a paper for the Common Weal think tank on an independent Scotland’s energy future, argues.
Finally, energy privatisation, which began with the sell-off of British Gas in 1986, has “had a major effect on prices over the long-term,” Morgan says. Despite the fact that household energy consumption has declined since 1996 (the furthest year figures go back to), the price of electricity had risen by a third and the price of gas by over half in real terms by 2019, well before the latest price surge.
‘Hug yer dug’?
IT’S easy for an air of inevitability to seep in around surging energy bills, but we should remind ourselves that it’s not the same everywhere. The French Government has imposed a 4% cap on energy prices in 2022. Morgan says that the main reason the French Government could do this is because “many French energy companies are either fully or partly state-owned”.
That’s not the case here, where more than £1 billion in profit was made by the UK’s “big six” energy suppliers, according to the most recent figures. SSE, the Perth-headquartered firm, made pre-tax profits of £600 million, the highest of any of the big six. Alistair Phillips-Davies, CEO of SSE, made £1.6m in the first year of the pandemic. These companies have a big cushion to cope with rising gas prices, when millions of Scots just have a hard floor.
In April, members of the Wyndford Residents Union in Glasgow held a “Hug Yer Dug Day” in reference to the SSE’s proposed solutions to the energy price hike. The company had to apologise after encouraging customers to have “a cuddle with your pets”, eat “hearty bowls of porridge” and do “a few star jumps” to cope with the cold.
“That’s why we’re highlighting that by naming this ‘Hug Yer Dug Day’,” Stephanie Martin, a Wyndford resident, said at the protest outside SSE’s offices. “We want to make a mockery of the suggestions just as we feel they made a mockery of us.”
The union claims that when the district heating scheme was installed by SSE and the social housing provider Wheatley Group in 2011, it was told this would reduce fuel poverty, but the promises have not come to fruition, and its members too have now been hit by a 50% price hike.
The Wyndford community are not the only Scots with reason to wonder whether the excuses they are being given for surging prices by Ofgem and the big six energy companies really stand-up to scrutiny.
