Interrogating British Gas’s energy bill rise
British Gas suggests that the cost of a government energy efficiency programme is going to nearly double next year – adding a significant amount to its bills. But why is the company’s estimate of the costs of the Energy Company Obligation (ECO) so much higher than competitor SSE’s?
British Gas raises bills
British Gas announced a 9.2 per cent rise in energy bills today. The average bill will increase by £107, from £1,190 this year to £1,297 next year.
The company blames rising network charges, ‘environmental and social costs’, and an increase in the wholesale cost of energy.
But the company singles out one policy for pushing bills up. British Gas says that £40 of the rise will come from the increasing cost of a government energy efficiency scheme known as the Energy Company Obligation (ECO).
The company calls for government to ” reform” the scheme to make it more affordable. But the government, which wrote to energy companies last week to ask them to publish the costs of delivering the Energy Company Obligation, says:
“British Gas’s ECO numbers just don’t add up when you look at what other energy companies are saying about their costs”.
Looking at the numbers
ECO came into force in January 2013, replacing two other energy efficiency schemes. The scheme subsidises insulation for low income and hard-to-reach households.
The government estimated that in 2013 ECO would make up £47 of the average dual fuel consumer bill, as shown in this infographic from DECC:
Image - Screen Shot 2013-10-17 At 11.36.28 (note)
Source: DECC
The British Gas press release says that whatever ECO is currently costing, the company thinks it’s going to cost an additional £40 over the coming year:
“British Gas is playing its part in a Government initiative, called the Energy Company Obligation (ECO), to transform homes and communities across the UK. However, we estimate that ECO will add £40 to the average dual fuel customer’s bill in 2014.”
The wording is a little ambiguous here, but we have checked it with British Gas. They say responsibility for £40 of the £107 price rise rests with ECO.
How much does British Gas think ECO costs?
We have asked British Gas what their assessment of the total cost of ECO per customer is, and we await a response.
We have tried to roughly work it out. In its press release, the company says it “expect[s] to incur charges of more than £400 million on ECO this year, rising to almost double that amount next year.”
Dividing £400 million by the number of British Gas customers suggests the measure currently costs the company £42 for each of its 9.5 million customers – broadly similar to the government estimate of £47.
We can also roughly calculate the company’s assessment of what ECO will cost it next year.
£40 extra from the 7.8 million households who are not on fixed tariffs would provide the company with an extra £312 million in 2014. According to British Gas’s figures this would put the total cost of ECO at £712 million – a 78 per cent rise on 2013.
Of course, our calculations are somewhat tentative, but unless British Gas confirms to us its assessment of ECO costs, it’s likely to be the best we can do for the moment.
Comparison to other energy companies
Energy companies have complained that ECO is more expensive to deliver than expected. But there is a lack of transparency in this debate which makes it difficult to understand exactly what’s going on. British Gas don’t provide any further information about why it expects the costs to go up so much.
British Gas’ assessment of the cost of ECO is certainly a lot higher than that of its competitor SSE. Figures from SSE suggested last week that the total cost of all the government’s environmental and social measures would rise by about £15 over the coming year. That includes energy efficiency measures and the cost of subsidising low-carbon energy, and is less than half British Gas’s estimate for ECO alone.
ECO may cost British Gas more because the company is not as good at delivering the scheme as its competitors. Of the Big Six, British Gas was the worst performer in terms of its ability to hit previous energy efficiency targets, according to research by thinktank IPPR.