In Thinking, Fast and Slow, Daniel Kahneman describes his research into the following quirk of human nature. If we obtain something desirable, and then lose it or have it taken away some time later, we are unhappier than we would have been had we never received it in the first place. The ‘something’ could be anything we like – money, property, a partner, a friendship, work status, … even perhaps a reduction in our energy bill.
At the time of writing, Ofgem might be experiencing an acute sense of the truth of this observation. On Friday, the regulator announced an increase of £96 in the price cap for default energy consumers, with a new level of £1,138 (based on typical household consumption of electricity and gas) applying from 1st April 2021. This made national headlines, with many emphasizing the cruelty of a significant increase in these Covid-affected times.
Less attention was given to the fact that last summer Ofgem reduced the price cap by £84 for the winter 2020/21, or that this current level is the lowest since price caps were introduced two years ago. Several interpretations of this fact are possible: one might infer, for instance, that the price cap could have been lower to begin with. The point being made here is simply that Ofgem warned, repeatedly, that the current level might not last. In July, they stated that Covid had led to a fall in demand, hence a fall in wholesale prices and costs, and the opportunity had arisen to reduce bills significantly; they also stated that the reduction was temporary – that if costs returned to pre-pandemic levels, the cap might have to rise again. This was re-stated in October. In November, they warned that the cost associated with unpaid bills had escalated, which might place further upward pressure come the spring.
Fair to say the warnings have been a little submerged in some of the recent media reports.
Suppose the price drop in October had not occurred. Ofgem would now be reporting an increase of around £12, or 1%, roughly the same percentage as the Consumer Price Index movement over the last 12 months. It could have been announced as “price cap held fixed in inflation-adjusted terms”. Not much of a story there. The media would have been uninterested.
And yet customers on default tariffs would have been worse off because they would be paying more for electricity and gas in these winter months. Worse off in money terms that is, but probably happier because they would not have received a benefit (price reduction) that would be subsequently removed in the spring.
Equality and the environment
Fuel poverty is an emotive topic. To express any sympathy for Ofgem’s position runs the risk of being branded as middle-class and out-of-touch with the brutal reality facing thousands of households that have to choose between feeding their families and heating their homes.
Fuel poverty is serious. Its very existence is evidence of social and political failure. The state of the environment is also serious: as Mark Carney reminded us in a BBC interview two days ago, not that we should need reminding, climate change is likely to lead to many more deaths and much more hardship around the world than coronavirus.
A sound principle is that the price of a product should reflect the damage caused by its consumption. If David Attenborough is right and we are on the verge of another mass extinction – this time caused by humans via global warming – then energy consumption should be not cheaper but more expensive for most of us.
If we then say the fuel poor should be exempt or compensated, how do we define the fuel poor and how do we administer exemptions or compensation? No easy answers here, as successive governments of different colours have found.
If only we had a more equal society – or at least one in which everyone had a basic level of income. Then we could move on from the debate about fuel poverty, put an environmentally fair price on energy, and and give the proper economic support to a greener way of life we so desperately need.