How much of SSEs energy bill hike is due to green subsidies?
From this morning’s front page headlines, you could be forgiven for thinking energy company SSE put up its bills yesterday entirely as a result of subsidies for green energy. Analysis by one thinktank indicates that they only account for a small portion of the rise, however.
SSE put the cat amongst the pigeons yesterday by announcing a price increase that will amount to an extra £93 on the average bill. It blames a variety of changing factors, including the changing wholesale price of energy. But media commentary focused largely on the role of government levies – intended to support renewable power and increase energy efficiency – in driving up bills.
So why has SSE pushed up prices?
Covering costs
SSE says bills will go up by £93 on average from November 2013, but doesn’t say how the total breaks down in pounds and pence. Left-leaning thinktank IPPR has attempted to do that job. Its analysis indicates green measures are responsible for £15 – or about 16 per cent – of that increase.
SSE says wholesale gas and electricity costs make up around 50 per cent of the bill, network charges around 25 per cent, government schemes around 10 per cent, and VAT around five per cent.
SSE says its average annual bill is going up by £1,131 to £1,224 because these elements have become more expensive. Over the past year, the price of wholesale gas has risen by four per cent, network charges are up by 10 per cent and the cost of government policies – including green charges – have risen by 13 per cent, it says.
IPPR crunched these numbers, turning SSE’s announced percentage increases into pounds on an average household’s bill:
Image - IPPR with old bill (note)
And here’s the price hike bit, zoomed in:
Image - IPPR new prices zoomed (note)
Graphs created by Carbon Brief, using IPPR data
Using this method, £23 of the rise is unaccounted for. IPPR suggests this sum might go toward paying for ‘internal operational costs’ – things like computer systems, staffing costs, and marketing – and profits.
The rest can be accounted for by increases in the wholesale cost of gas and electricity, network charges, VAT, and government levies (including support for renewable energy and other green policies), according to SSE.
Elaboration
The energy industry is notoriously difficult to understand – with a huge variety of different deals available and complicated trading arrangements. This means that these kind of calculations are always a simplified version of what’s going on.
When we asked SSE to elaborate on IPPR’s calculations, it pointed out that it has an “infinitely complex array of customers, with individuals on different tariffs”. It says it tried to give as accurate an understanding as possible of what’s happening, within those limitations. So IPPR’s calculation is a simplification of a simplification.
The company also pointed out to us that the numbers IPPR used for its calculation looked at what happened to different costs over the last twelve months. But in setting bills it has to look at what might happen over the next year as well.
SSE has pledged not to increase its bills again until this time next year, so it has made sure it’s added enough to cover expected increase in costs over the next twelve months.
Since it’s impossible to know exactly how much costs might change over the coming year, IPPR’s analysis can’t give any indication of how much extra profit SSE might make from the price hike. In other words, that’s how much of the purple chunk in the graph above goes into SSE’s pocket.
SSE says it expects its profit margin to average five per cent over the next three to five years – although it predicts it will fall short of that in this financial year.
But household bills aren’t the only way energy companies make profit. SSE didn’t say how much it expected to make from power generation – where profit margins are much higher. Energy companies made a profit margin of 24.4 per cent on generating energy in 2011, according to a report by the Energy and Climate Change Committee.
Energy companies don’t report what profit they make from all the elements of their business added together, so it’s hard to know how much they make overall. But until they start reporting this information with more clarity, SSE and others may have to put up with slightly crude analyses from NGOs and thinktanks trying to work out what their announcements will really mean for consumers.
Not just green taxes, honest guv
SSE told us it isn’t just blaming green taxes for the hike in bills.
Its press release flags up three different factors – the rising wholesale cost of energy, the increased costs of transporting energy through the network grid, and the cost of government levies.
A spokesperson told us: “We’ve been clear and consistent on this”, adding that if the press choose to highlight the cost of green subsidies, that’s not SSE’s fault. That might be right, although the comments by SSE’s bigwigs rather bely this statement. As SSE’s CEO, Alistair Phillips-Davis told the Telegraph:
“We need to think about what people really want to pay for; maybe it’s time to retreat from decarbonisation and focus more on the cost of living. I think we have to have a debate about it.”
All in all, these factors are hard to pick through. What’s more, SSE’s statement is probably only the beginning of the fun. Judging by last year’s experience, other energy suppliers are likely to follow suit.
Both the government and Labour have pledged to reform the market push the energy companies to be more transparent. For those trying to work out why energy bills are increasing, it can’t come soon enough.