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Keeping future energy and water bills affordable

Following a workshop of New-Pin sponsors and supporters in October, Sustainability First has published the first of its major New-Pin policy papers, on long-term affordability.  Sharon Darcy, Sustainability First’s lead associate on the project, summarises the paper below.

Robust energy and water services are essential for individual and environmental health and vital for a strong economy.  Although a significant minority of people currently struggle to pay their bills, we all have an interest in ensuring bills are affordable, fair and acceptable – both for today and tomorrow.

In the coming decade, two thirds of the projected investments in the energy sector and nearly all of the projected investments in the water sector will be met through consumer bills.   At the same time, some are predicting that households in low-income groups may see their incomes decline.

Looking ahead, the energy sector faces a step change in costs as it seeks to cut its climate emissions and weather proof its services.  There is significant uncertainty around future wholesale costs, the price of carbon, and the effectiveness of energy efficiency measures that are designed to offset these. If this uncertainty leads to a delay in low carbon investments, risks and costs could increase, potentially making energy even less affordable for future generations.

In water, costs are likely to increase more incrementally and be driven by the need to adapt to both droughts and floods.  However, the ‘unprecedented’ weather of recent weeks is a sobering lesson that the future is not always the same as the past. Key uncertainties are around the scale of future sewerage costs and the quantity and quality of water resources.

When thinking about who should pay for future costs, there could be a logical fairness argument that long-term investments that primarily benefit future users should be met through ‘progressive’ taxation to pool risks and costs within and between generations.  However, in the current fiscal and political environment this may not be credible, except in the case of strategic investments of national importance or where Mayoral Authorities decide to pay for projects through business rates and local infrastructure funds.  This position clearly has distributional impacts.

The existing problems faced by energy and water consumers that struggle to pay are therefore unlikely to diminish in the future, and may actually increase.  A more holistic view of costs (including the costs of natural capital maintenance and repair) is needed if the full impacts of future affordability pressures are to be understood.  Energy and water companies are likely to continue to have a key role to play in managing this issue and will need to proactively develop strategies to identify groups that will struggle before they get into difficulty, working in partnership with third parties to develop and deliver targeted information, advice and support.

Consumers through their every day actions can help to reduce costs by using resources more efficiently.  However, the wider ranging and systemic risks and challenges that the energy and water sectors face will require a more coherent and joined-up approach to policy, regulation and service delivery in the future if long-term efficiency and affordability are to be maximised.

A clear vision and stable, predictable policy and regulatory frameworks on both the supply and demand sides will be needed to keep future costs as low as possible.  These should set out any trigger points for reviews in advance and also cover the future role of building and appliance standards and in-home communications infrastructures. Consideration will need to be given as to how to incentivise key actors such as developers to facilitate efficiency and resilience.

There is clearly an important role for competition in and for the market (eg auctions) to reduce long-term costs.  However, to release the potential of the demand side and facilitate technological and commercial innovation, it may also be helpful to take a fresh look at the respective contributions of competitive compared to collaborative approaches to managing long-term costs.  Re-shaping and / or integrating new markets comes at a cost if institutional inertia is to be overcome and market actors to be persuaded to form new partnerships and work outside their existing ‘vires.’  Recovering such institutional and transition costs on an ad-hoc basis could make it difficult for the energy sector in particular to evolve at the ‘right’ pace of change. A less atomised and more strategic approach to managing such costs may be needed.  The newly created National Infrastructure Commission could potentially provide a useful contribution here.

If future major investments are going to be primarily met by bill payers, it will be important to ensure that costs and profits are transparent.  Armed with comparative information on these points, consumers and public interest advocates will need to be engaged in decisions about prices and investments in a timely fashion so that change can take place in an acceptable and measured way.  Being clear who is making and accountable for decisions as to what should be paid for - along with who is bearing the long-term risks and accruing the long-term benefits – will be vital if the legitimacy of decisions and decision makers is to be maintained.

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