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Gas prices and poverty

• Robert Peston
• 2 Mar 08, 11:55 AM

I almost feel sorry for our gas and electricity companies.

They operate in a competitive market largely devised by this government.

The wholesale price of gas has been rising very sharply.

And yet when they push up the prices they charge us, they are accused of profiteering.

Now these businesses are not as transparent as would be ideal.

Many are part of giant overseas businesses.

Some, like our own , do a good deal more than sell power to consumers.

So there is plainly the scope to fudge and obfuscate the true profitability of supplying energy to households.

But it would be little short of a miracle if any of them were making much of a return right now – and it is highly unlikely that any will do so over the next year or so.

The point is that over the past 12 months the wholesale price of gas has risen by more than 50%.

But the price charged to you and me has gone up recently by around 15%.

That means profit margins are being eroded very significantly.

Excess profits are not being generated.

That said, there was a period last year of two or three months when wholesale prices fell much faster than the retail tariffs imposed on us by power companies.

It led to a blissful period for the power giants of fattened earnings.

But the fat times didn’t last, because there is an effective consumer lobby which exposes when these energy businesses show the slightest inclination to profiteer.

What should be a concern to all of us is that forward wholesale prices for gas next winter are 22% higher than the current price.

So the recent increase in consumer tariffs may not be the last.

In that context, it is understandable that the Chief Secretary to the Treasury, Yvette Cooper, is having private meetings with each of the power giants, to discuss initiatives to provide affordable energy to those on low earnings, to combat what’s known as fuel poverty.

There has been much chat that she’s thinking of imposing a windfall tax on them, if they fail to come up with effective proposals.

Don’t hold your breath for that new tax, because there is no windfall being generated in their mainstream power businesses.

Which the Treasury now concedes.

And the chancellor, Alistair Darling, has also made clear he has no intention on following through on a proposal from – the energy regulator – to levy some kind of one-off tax on a genuine windfall, the surplus value of emissions-trading allowances given to generators.

Instead the government strategy appears to be to shame the power giants into providing cheaper energy to those who can afford it least.

What it would like is an eye-catching announcement in the forthcoming Budget.

But there are risks for the Treasury.

First, if all the companies are coerced into behaving like good corporate citizens, there’s no incentive for any individual company to behave better than the others – which could in the long run have a deleterious impact on corporate behaviour.

Second, if energy companies view any fuel-poverty initiative as a de facto tax, they may well be minded to drag their feet on making much-need and very expensive investments in new, low-carbon generating plant.

Third, any reduction in prices for those on low incomes is almost certain to lead to increased energy prices for those on higher incomes. There would be a cross-subsidy from the energy haves to the fuel poor.

In other words, a programme to combat fuel poverty could be seen by most energy consumers as a stealth tax. Would they blame the energy companies for those increased tariffs? Or would they blame the Treasury?

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