We are used to thinking about energy in terms of annual spend by individual households but this can be misleading, especially over time.
For example, if consumers use less energy because suppliers raise prices, those would-be savings are partly offset by the higher unit rate consumers face. We also know these price effects differ across the income range (middle-income households react significantly more than the poor and the rich, for fairly intuitive reasons) and that demand for energy is not very elastic anyway. Furthermore, suppliers often put up unit rates in response, at least partly, to falls in consumption so as to maintain their profit margins – and so the cycle perpetuates itself.
We can see this pattern of using less energy over time while still facing higher bills using data from the Department of Energy and Climate Change (Decc) in the top graph.
On the yellow line read from the left is all the energy used by UK households each year since 1970. It roughly tracks general economic activity and traditionally goes up over time as the economy grows and living standards rise. Generally speaking, we all used more and so paid more, especially as the number of households grew, we got richer and our technological expectations expanded. In the 1990s there was a pronounced drop in spend even as consumption stayed high, perhaps linked to the initial efficiency gains from privatisation.
Consumption is now on a downward trend that began in 2004, with people becoming much more conscious of their energy use and installing energy efficiency measures – and reacting to the price increases during this period. Just look at the overall spend on energy by households (black line, right axis and inflation-adjusted), especially the nearly vertical line in the mid-2000s. Despite using much less energy the overall spend was higher in 2011-13 than it has ever been.
If we isolate the 2003-13 (the latest year of these figures available) part of the chart, this increase in spend despite markedly lower consumption is clearer. Indeed, these figures understate the per household demand fall because they do not take into account a much higher population and a higher number of households due to lifestyle changes.
If this medium-term trend continues, the pattern would have us not using any energy by the year 2100. Of course, this trend will in practice level off at some optimal point. People have a minimum aggregate energy demand that will then affect the overall expenditure. But all this raises important policy questions for consumer advocates. The primary one is how much of the gains accrued from using less are reaped by consumers, and what it means for regulation if suppliers benefit disproportionately. Perhaps this also leads to questions about what constitutes a fair rate of return.
It also concerns demand reduction across the income scale and raises questions about schemes like the Green Deal. Connected to this are the problems poorer households always face when unit prices rise (assuming they are economising already) and that many demand reduction schemes fall on them in cost but not benefits. It is almost always the case that the more comfortably off can navigate the market better and thus obtain cheaper prices, and that they have enjoyed energy efficiency and other gains too. Surely general taxation would be a better route of funding for such schemes? How smug can we be about using less overall knowing that at some level people are cutting back to a dangerous degree?
It is worth remembering that energy spend is ultimately based on a price per unit and that using less, while a clear social good, has pernicious effects that may be worthy of further investigation. We do not want to congratulate ourselves too much if these savings exacerbate existing social and economic problems in the retail energy market.
Andrew Hallett, policy manager, Citizens Advice