by Atul Hatwal
Ofgem research contradicts government claims that costs will not be passed onto consumers
As George Osborne and Danny Alexander struggled to deny that increased taxes on North Sea oil would simply be passed on to consumers on petrol forecourts, it emerged that these taxes would also hit hard-pressed households’ energy bills.
Wholesale costs faced by the big household energy suppliers, who are involved in energy exploration and production in the North Sea, are set to rise when these new taxes are levied.
New research released by Ofgem this week revealed how these increased costs will feed through into household energy bills.
The report, entitled “Do Energy Bills Respond Faster To Rising Costs Than Falling Costs“, was sneaked out on Monday. It details how energy suppliers don’t just pass on an increase in the wholesale costs of energy, they hike customer bills by almost 10% more than the original cost increase.
Applying Ofgem’s analysis to the changes announced in the budget, all households that use energy from the major suppliers facing higher oil and gas taxes will be hit, regardless of whether they benefit from the cut in fuel duty.
The result will be millions of non-drivers subsidising motorists’ petrol costs through their energy bills, raising new questions about David Cameron’s claim that this would be the “greenest government ever”.
Even worse, Ofgem’s analysis shows that when energy suppliers’ wholesale costs decrease, they don’t pass on the full benefit to consumers. Instead, they pocket over 60% of the difference, leaving prices much higher than before the initial increase.
This means that the fuel stabiliser is likely to permanently ratchet up energy prices for consumers.
Even if oil prices go below the government’s proposed $75 per barrel mark and taxes on North Sea oil and gas are reduced, according to Ofgem’s analysis, household energy bills will fall by less than 40% of the reduction in taxes.
Higher bills will hit hardest for the 4.5m households classified as being in fuel poverty. These households spend more than 10% of their income on fuel. According to the latest government figures, their number more than tripled between 2003 and 2008.
With numbers predicted to soar when the figures for 2009 and 2010 are released, the new danger is that the upward ratchet in household energy bills created by the fuel stabiliser will trap many more in this position.
The detail of the fuel stabiliser’s impact raises questions about George Osborne’s judgement.
Specifically, why has he gambled so much on something which will hit millions of consumers through their household energy bills yet only have a negligible impact on petrol costs, if any?
The reasons can be found in two of this chancellor’s particular weaknesses – one economic and one political.
On economics, Osborne has a neocon-like faith in the social good of big business.
For all the rhetoric in opposition on the need for regulation following the financial crash, Osborne’s practice in government has been the opposite. As Robert Peston commented, this was above all a budget for big business.
The chancellor might be talking about “watching the oil industry like a hawk” to check they don’t pass on the cost increase to customers, but what does this mean? Has any sanction been identified? If so, he hasn’t shared it with the public.
The reality is that George Osborne has based the success of his flagship budget announcement, the fuel stabiliser, on the good graces of multinational oil companies and energy suppliers in not passing on higher tax costs to consumers.
It is not clear why he thinks that profit-maximising multinationals, concerned with shareholder value, would suddenly become altruistic.
Osborne is almost a utopian Marxist – possibly the first and only time that comparison has been made – in thinking that these people will take an enlightened view and make the right decision for the common good.
Both energy and petrol markets are dominated by a handful of enormous suppliers – six companies in each – and are exemplars of what happens when competition is stifled.
It’s got so bad in the energy industry that, in a move which is tantamount to admitting complete failure in delivering their remit, Ofgem has recently opened a consultation on whether to refer the whole industry to the competition commission.
Companies are under an obligation to maximise shareholder value. If the costs of the fuel stabiliser tax can be passed onto customers without consequence as long as the other five companies also do it, why wouldn’t they?
In terms of his political weakness, George Osborne has a Gordon Brown-type love of budget wheezes. He can’t pass a hat without trying to pull a rabbit out of it.
Sometimes they work, as in 2007 when his inheritance tax policy scared Gordon Brown into abandoning an early election. It was brutally effective in opposition, but it is notable that a policy which would have amounted to a multi-million pound tax cut for the richest was quietly abandoned when it came into contact with the realities of government.
Sometimes they are too clever by half – like his closing claim in the budget last year that the Tories were cutting less than in Labour’s plans over five years. This was based on the most tenuous assumptions and completely at odds with his message of the previous months that Labour’s plans involved cutting too slowly and too lightly.
And sometimes, like the fuel stabiliser, they are that bit too rushed.
Policy in government is very different to proposals in opposition. Things will actually be implemented and unless every angle has been covered, something will go wrong. That’s why policy takes longer to develop, needs to be worked through and most wheezes are ruled out at some point in this process when a problem emerges.
But when faced with a tight deadline, and the need for a new rabbit on fuel costs, George Osborne went with his instincts from opposition and figured he could make it work.
He has fallen victim to the perennial problem for bright men and women in politics – the curse of ability.
Like his boss, David Cameron, Osborne’s experience in life to date has been that when under pressure he has normally been able to get through because of his natural intelligence, his ability to think quickly on his feet and his capacity to persuade others that he is right.
These are important qualities for politics, and particularly effective in opposition.
But government works differently.
The volume of detail and number of different moving parts to any policy, particularly one like this which touches millions of people, mean it is impossible to busk it, no matter how able the politician.
The punishment for this curse is to be found wanting when the spotlight of government is at its brightest. For many, it would have been better to be less able, and know it.
George Osborne isn’t quite at that stage. Yet. But he will be starting to feel the heat of the light as the tough questions about his budget start to get asked.
And as the policies he announced on Wednesday move from press releases to reality, he should get those Klosters sunglasses ready – things are about to get a lot hotter.
Atul Hatwal is associate editor of Labour Uncut.
Tags: Atul Hatwal, Budget, energy, George Osborne, ofgem
It’s funny, you know, I’m pretty sure that when Labour was in government, many on the left (in the broadest sense of that term) argued repeatedly for exactly this sort of tax on the oil and gas sector.
yes and thats after 13 years of labour and the people demanding fuel prices be fair.