By John Kemp
LONDON (Reuters) - Britain's gas and electricity suppliers should itemize customer bills to show how much of the total is related to the fuel costs, transmission charges, company margins and the government's own energy policies.
The recommendation is contained in a wide-ranging and insightful report on "Energy prices, profits and poverty" published on Monday by the House of Commons Select Committee on Energy and Climate Change.
Several energy suppliers have already threatened to itemize bills. Doing so would make explicit the costs associated with transmission upgrades and policy measures to reduce carbon emissions and fuel poverty. For the same reason, itemization has been unpopular with ministers and regulators.
Poor communication is at the root of many of Britain's energy problems. Until there is more transparency and honesty about the factors driving bill increases, customers cannot be expected to start trusting energy suppliers again or give informed support to the government's climate change and energy efficiency policies.
Average retail prices for gas and electricity have risen by around 41 percent and 20 percent respectively since 2007, after allowing for inflation, according to the committee. Most of the increase so far has been driven by a sharp rise in the cost of fuel.
But bills are expected to carry on rising faster than inflation through 2020, and in future much of the increase will stem from the government's policies to encourage more renewable generation and improve fuel efficiency for domestic customers.
Transmission charges are set to increase sharply to pay for the modernization of the national grid, much of which is now nearing the end of its planned operational life, as well as covering the cost of integrating more wind farms.
In addition, increasing levies are being applied to bills, mostly for electricity, to pay for a range of government-mandated programs. It is these levies which attracted much critical attention from the committee.
They include the Warm Home Discount (which provides discounts to elderly customers on low incomes and some other financially disadvantaged groups) and the Energy Company Obligation (which funds a variety of insulation programs designed to improve energy efficiency across the housing stock).
Taxpayers fund annual Winter Fuel Payments to pensioners worth 100 to 300 pounds each through the benefits system, at a total cost of 1.7 billion pounds ($2.6 billion) a year. Taxpayers also fund Cold Weather Payments made to low-income pensioners and other vulnerable households when temperatures drop below zero degrees Celsius for a sustained period, estimated to have cost more than 200 million pounds in 2012/13.
But the rest of the government's renewable and energy efficiency programs are being funded by customers through a complex network of levies on their bills. Policy support includes the Warm Home Discount (237 million pounds); the EU Emissions Trading Scheme (700 million); the Carbon Floor Price (900 million); the Renewables Obligation (2.2 billion); and Feed-in Tariffs for small-scale renewables (nearly 200 million).
In future, capacity payments and other support designed to pay for a new generation of nuclear and gas-fired power plants will also be funded through bill levies.
The government's decision to fund its programs through bills rather than general taxation and subsidies is controversial.
"The choice of whether to use bills or taxes to fund the decarburization of our energy infrastructure matters because it greatly affects the distributional impact of where these costs fall," Consumer Focus, which represents retail users, told the committee. "The poorest households pay proportionately more when measures are added to their utility bills."
National Energy Action, a charity that aims to end fuel poverty and campaigns for greater investment in energy efficiency, said: "The levy is regressive ... because it does not take any account of (the customer's) ability to pay."
But levies have proved popular with ministers in both the current Conservative-Liberal coalition and the previous Labor administration because they shift the cost of energy policies off budget, helping to hide the expense, especially in an era of austerity.
"The big debates ... happened both in the last government and the early stages of this government when they were doing the spending review and there was a decision that they would continue with these levies on customer bills," Edward Davey, the minister responsible for energy and climate change policy, told the committee.
In theory, it makes sense for the users of gas and electricity, who benefit from the services, to pay for upgrades, including those needed to make the systems more climate-friendly.
The government told the committee it assumes levies are being passed on to customers "on the basis of the relevant units of energy supplied". But it is unclear how much of the charges are being levied on a per-unit basis and how much per household.
The committee expressed concern the system could be disadvantaging a range of customers - including poor households with low energy usage; rural households; households with disabled and other vulnerable members who have unavoidably high usage; poor households in badly insulated homes; and customers who are off the gas grid and have no choice but to use increasingly expensive electricity to meet their heating needs.
Under the Warm Homes and Energy Conservation Act, passed in 2000, the government has a statutory obligation to ensure "as far as reasonably practicable" that by November 2016 "persons in England and Wales do not live in fuel poverty", defined as spending more than 10 percent of their income to maintain an adequate level of warmth.
Given the sharp rise in gas and electricity prices in recent years, the government will almost certainly not meet this target. Policymakers are considering how to reformulate it. But the committee's report expresses concern that bill levies are making the situation worse.
"We are particularly concerned by the significant projected increase in the wholesale electricity price and how this will impact on households reliant on electric heating," the committee warned. "It is clear that vulnerable and fuel-poor customers require protection from the impact of rising bills and extra support to ensure affordable warmth in their homes."
Policymakers and energy suppliers are anxious to claim credit for policies that reduce carbon emissions, improve insulation and protect elderly and other vulnerable customers, but neither wants to accept resulting costs.
Ministers like to trumpet policy measures, but have gone to great lengths in a series of reports to downplay the expense.
The committee also criticized energy suppliers for simultaneously blaming and taking credit for government programs.
Suppliers blame government for rising prices, but like to point out how much they are helping customers by offering free or subsidized insulation. "It is not always made clear that the latter is paid for by the former," according to the committee.
Time and again the committee has faulted energy companies and the government for their poor communication with customers. "Confusing bills, complex tariffs and a lack of transparency ... have fuelled deep mistrust among customers," it found.
Communicating the reason for price rises is vital to restoring trust and building acceptance for policy. The Confederation of British Industry has called for the industry and government to have "a more honest conversation" about the issues. "Energy bills are going up. Neither side should try and hide the facts. But we should be clear about the reasons why."
In its most important recommendation, the committee echoed this call for better communication. Members of parliament said the Department for Energy and Climate Change "should lead a full and frank conversation about the contribution that customers are being expected to make towards ensuring we have safe, secure and affordable energy supplies in future".
Without it, the angry debate about rising bills will become even more toxic.
(John Kemp is a Reuters market analyst. The views expressed are his own)
(Editing by Dale Hudson)