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Don’t make the consumer pay for these inflated fuel prices

It was only last April that energy secretary John Hutton persuaded Britain’s big six energy companies to double their spending on social tariffs for the fuel poor, to £100m this year. The proud boast was an extra 100,000 people would pay greatly reduced fuel bills. Then came commitments to invest in renewables and nuclear as part of a concerted drive to make Britain’s energy more secure, cheaper and with a lower carbon footprint. In energy legislation, economic rationality, social justice and business-friendly policies were marching in happy union. Labour had everything under control.

Four months later and the story looks very different. Oil prices have rocketed; gas prices followed suit. Although they try to hedge against such massive price hikes, energy companies are having to increase their tariffs. Centrica has been pilloried on all sides for raising gas prices by 35 per cent; frankly, given that the price of natural gas in the wholesale markets has risen by 350 per cent in 12 months, the surprise is that the hike is so small.

If John Hutton had succeeded in taking 100,000 out of fuel poverty, gas price rises on this scale will plunge another million straight back into a grim universe in which 10 per cent of their income is dedicated to paying energy bills, the definition of fuel poverty. Suddenly the air is thick with calls for windfall taxes on energy companies, particularly as oil giants BP and Shell are reporting massive profits.

Such loot should be diverted to alleviate the conditions of approaching five million fuel-poor, runs the argument. After all, in 1997 New Labour raised some £5bn in a windfall profits tax – justified because the privatised utilities had been given away too cheaply – to fund spending on education and the New Deal. Now it should do something similarly radical and popular to head off electorally damaging increases in its voters’ fuel bills. Chancellor Alistair Darling is said to be actively considering just such a move.

But as much as introducing a one-off tax on the energy companies to make a one-off payment to the fuel-poor, the government needs to address the way the entire energy market – and welfare system – is organised. To further tax Centrica, for example, whose 58 per cent tax rate is the highest in the FTSE 100, simply because the oil price has gone up is arbitrary. Is the government proposing a rebate when oil and gas prices fall?

The problem is much deeper. If you want to criticise the free market, look at the design of Britain’s energy markets, particularly the wholesale market for gas where the big companies buy and sell to one another. As gas prices shadow every movement in oil price, other European countries have carefully built a substantial infrastructure to hold sufficient reserve stocks of gas in their systems to smooth price changes. Not in free-market Britain.

Amazingly, as North Sea gas production declines and we become more dependent on imports, we have capacity to store only 13 days’ worth of gas. Germany has 99 and France 122. This would be less worrying if imported liquefied natural gas could enter the country easily, but the terminals are not run to make it easy to bring in extra deliveries, rather to maximise the short-term profits of the companies that run the ports. There is absolutely no slack in the system.

So as wholesale gas prices have risen, the British system has offered no buffer to smooth the impact. Worse, the London oil market has been designed only to benefit its member traders. The so-called London loophole, created by the Labour government, excuses the London oil market from independent and transparent oversight. Traders’ positions are unpoliced; the scope for market manipulation is vast, the extent unknown. Britain has resisted worldwide criticism, arguing that London-based speculation and rigging has nothing to do with the oil price rise; but the $25 a barrel collapse in the price over the last three weeks as speculators unwind their position has made the government’s argument untenable.

Speculation is part of the oil price rise, and most of it is rooted in out-of-control London. Meanwhile, hoped-for rises in gas supplies from Europe via the so-called ‘Interconnector’, the pipeline between Belgium and Bacton in Norfolk that might keep the price down, failed to materialise. European producers prefer to keep their gas at home to insulate their own markets from the increases.

If the government was serious about energy prices it would want to redesign this market structure. It would invest in this missing gas infrastructure, police the way oil trading is conducted and create a less volatile environment. It should move on every front.

In parallel it should address fuel poverty. Winter fuel payments of up to £300 are currently paid to everybody over 60, whatever their income. Instead, the system should be re-organised so that the fuel-poor of whatever age get support. Identifying who they are is expensive and difficult, but leaving it to the energy companies to decide is a cop-out. The government needs to take responsibility, and then direct the energy companies to organise their social tariffs accordingly. Most would be relieved, as EDF Energy tells the stakeholder advisory panel that I chair.

All this costs money, and one source suggested by the Business and Enterprise Committee, is to claw back some of the benefits, estimated at £9bn, that energy companies will rack up through being given free permits to trade emissions between now and 2012. This can be justified as getting back taxpayers’ money that was given away too easily, rather than arbitrarily taxing companies just because energy prices are high.

Nobody can prevent energy from becoming more expensive in an era of scarcity. But there are measures to ease the impact and spread the pain. They should be taken, even if powerful City and oil trading interests will protest that their freedoms are being constrained. The rest of us will pay less to stay warm.

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