When you next fill up your car, the cashier will not ask you your net worth before deciding how much to charge you for a tank of petrol. Rich or poor, trucker or taxi driver, we all pay the same bill for the same product. The same is true when we buy groceries, run the taps or pay for a streaming service.
Yet Ofgem, the regulator of energy markets, is proposing this should change for your household electricity bills. They are considering progressive pricing on standing charges, the 10% of the bill that covers policy costs like smart meters and (critically for Ofgem’s thinking) upgrades to the network.
There are no specific proposals, but we might imagine the current daily cap price of 53.8p (or £200 a year) doubling for households under bands F-H+ for council tax. This would be about 3 million homes across the UK, mostly concentrated in the South East and London, raising £600m a year. Or double that if they include band E, and assuming no disincentive effect from higher prices. This would essentially create a sovereign wealth fund for wires. Albeit nothing like sufficient to fund their own grid expansion plans.
Superficially, this isn’t a completely mad idea, there are plenty of ‘social goods’ we do pay for via progressive taxation, like schools, hospitals and defence. But our energy bills are not taxes, and progressive pricing in markets usually services discrete customer needs, such as per unit discounts on bulk purchases for your best customers. Ofgem’s plans are more like pricing as class war.
There is a case that the national grid is a social good, there are literal ‘network effects’ or positive externalities from having an integrated system, such as security of supply and economies of scale. But that is a discrete and contested case from how it is funded.
A century ago, the Central Electricity Board was set up as a state corporation. It used a combination of taxpayer cash and loans to link up a tapestry of regional and local entities to create the National Grid. They recouped the money through charges to generators and households. Which is essentially the system that survives today. Progressive underwriting, and proportionate recovery based on use.
If this changes to what will surely be dubbed Labour’s pylon tax, it will distort incentives, not least in creating a highly toxic political debate. So far, the most enthusiastic supporters of Net-Zero targets and early adoption of technologies like heat pumps and electric vehicles have been the well off. Who else, as with any other new technology, can afford the risk of change?
Their thanks from the Government will be to add 10% to the cost of running both. This will slow down adoption, which is already slower than the Government wants. It will turn some of Net Zero’s most influential cheerleaders into opponents. Particularly those who already think pylons are visual pollution that should only be built somewhere else.
It will incentivise better-off regions, communities and individuals to consider disconnecting from the grid entirely. Replacing the social benefits of collective action with punitive socialism has consequences.
The Government will likely try to offset this damage by hiding the costs of its electricity policy by putting some of them on gas bills or general taxation. But they were thinking about doing this already, and by creating this precedent, the same logic will soon apply to the gas standing charge, targeting decommissioning costs, not new investment.
It’s hard then to think of a more self-defeating policy. A fiddly little change that raises very little money, while annoying 7-14m highly capable and motivated people in the process, toxifying the project which is it designed to support. I suspect Number 10 would then hold a different view on this to the Secretary of State for Energy and Net Zero.
Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.
CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.
