Scottish Government approaching fuel poverty question from wrong direction

Former energy minister Brian WIlson (front)
Former energy minister Brian WIlson (front)
Brian Wilson
Opinion by Brian Wilson

The announcement of a publicly-owned Scottish Energy Company to take on the fat-cats and send prices tumbling served its immediate, and perhaps only, purpose – i.e. it had last October’s SNP conference whooping and cheering.

Now, in the cooler light of day, the Scottish Government has fed £315,000 into the ample coffers of EY to tell them what less expensive sources of information could have advised many months ago – that this is a lot more “challenging” than it sounds.

The word “challenging” crops up a lot in the EY report. It is a real “Yes, Minister” turn of phrase which translates roughly as: “This is really not a good idea but that is not what we are being paid to tell you. So just be careful and don’t blame us”.

The basic problem with the idea is that it addresses only one aspect of the energy market and it is the one which is most competitive and declares the lowest profit margins.

That is compounded in Scotland by the fact that the two dominant players, Scottish Power and SSE, control so much else in the sector because of the way privatisation was implemented.

SSE has just adopted a new approach to its retail business which involves a tie-up with NPower so it may reasonably be assumed that it intends to fight hard to protect and expand their huge customer base. Indeed, the stated aim of the merger is to make it more nimble and efficient for that purpose.

It is within the bounds of possibility that Scottish Power might pull out of retail with a parting message: “Good luck with that”.  Even if such an improbable event happened, the Scottish Energy Company would face a plethora of lean and hungry competitors – several of them Scottish-based and all fighting for survival.

At present, there are 42 companies supplying gas and electricity in Scotland. Half of them are loss-making though most are in the early stages of development. The last thing they want is another cash-rich giant entering the field with the power of government behind it. Even if outside the EU, which ironically enough would be advantageous for this SNP wheeze, the cry of “state aid” and “unfair competition” would soon go up.

One of the stated aims of the policy is to reduce fuel poverty in Scotland by reducing bills. That may be a laudable intention but if losses are to be avoided, it is by no means clear why a government-backed company could compete successfully against others which are buying their gas and electricity in exactly the same market.

As work by Strathclyde University’s Energy Policy Centre has shown, energy efficiency measures are likely to be more effective in fighting fuel poverty than cheaper tariffs, particularly when many who could benefit from existing competition options resolutely decline to do so. You don’t need a Scottish Energy Company to do more about fuel poverty.

The list of “challenging” issues goes on and on.  Even if Scottish Ministers are cavalier about the risk of losses and costs to the taxpayer, they will undoubtedly be concerned about potential political downsides. If, for example, they were seen at some future point to be raising prices instead of cutting them, it is unlikely to be a great vote-winner.

Such considerations can be kicked into touch in the short term for it is not by chance that the declared date for the Scottish Energy Company to open its doors and phone lines is 2021 – the year of the next Holyrood elections.

The plan, insofar as it existed last October, may have been for a great fanfare of trumpets around that event without too much regard for what happened thereafter.  But I’m not sure that is a sustainable approach because there are so many other factors which will call the case into question before then.

Indeed, the EY report offers a few potential “retreat options”. These include the Scottish Government piggy-backing on an existing supplier but branding it as the Scottish Energy Company – the so-called “white label” approach, which would inevitably be seen by competitors as an unfair advantage to the anointed partner.

So does all of this mean that nothing should be done? Of course not; it’s just that by going for the headine about a “publicly-owned Scottish Energy Company” the Scottish Government is approaching the issue from the wrong direction and, as it happens, one which ignores the distinctively Scottish aspects of the market.

The existing competitive market works less well in Scotland than in the rest of the UK because there is a far lower level of switching by consumers. This is counter-intuitive since, particularly in the north of Scotland, tariffs are higher than in the rest of the country with a far greater proportion of customers locked into the highest, the Standard Variable Tariff.

So why would you set up a Scottish Energy Company to cut bills if large numbers of Scots are already preferring “the devil they know” to the switching process which is now very simple and straightforward?  The answer to that lies largely in the dominance of the two big players.

When the electricity industry was privatized in the early 1990s, Scottish Power (now Spanish-owned) and Scottish Hydro (now SSE) were given hugely privileged status by retaining vertical integration, from generation to retail supply. That is quite different from the rest of the UK and undoubtedly deters consumers (however irrationally)  from moving away from them as retail suppliers.

There are lots of ways in which the continuing dominant role of these two companies invites scrutiny.  The Scottish Government might usefully establish an inquiry asking whether Scotland’s interests are best served by the existing structure of the industry – a far more fundamental question than the one a Scottish Energy Company is supposed to address.

There should also be recognition of the efforts of local authorities, such as Aberdeen and Edinburgh, to address the issue of energy costs and to expand their schemes into the domestic sector. In short, government can do a great deal – but not all of it would attract easy headlines which, in the end, usually come to not very much.