Recently, it was announced that the average electricity bill in the UK will not increase for a year and eight months if Labour end up in power after the general election in 2015. This suggestion is often referred to as a ‘price freeze’, and it certainly sounds like a good thing. However, you may be wondering whether it could have any adverse consequences. To get to grips with how a price freeze works and to figure out what will happen if one is implemented, you need to have at least a basic grasp of where your money goes when you pay your electricity bill. The following rough guide will help you to understand the reasons behind the promised priced freeze and the predicted consequences that are likely to result.
Motivating the price freeze
In September 2013, it was estimated that most people who receive dual-fuel bills (which encompass the cost of both gas and electricity) are paying around Â£1,315 every year. Depending on how much energy you use in your house, your electricity bill or gas bill may be quite a bit higher or lower than this estimate, but the important thing to note is that this national average is higher than it has been in many years. In addition, it is predicted that we can expect to see a sharp rise in prices over the next few years. Given these facts, it is unsurprising that promising a price freeze could be an effective way for a political party to boost its popularity with voters.
Where money ends up
When you pay the average electricity bill, you might find yourself bitterly wondering how much of this money ends up in the pockets of the electricity supplier. The most recent reports of profit indicate that the average profit margin is around Â£30 higher than it was last year and the year before. Some advocates of the current price rises will tell you that the current cost of energy is necessary rather than excessive, while dissenters will insist that this average electricity bill is motivated by greed rather than necessity.
When you pay your electricity bill, most of this money will be spent on buying electricity from generators or on the market. Indeed, 58% of electricity bills are used to for this precise purpose (in contrast to 67% of gas bills). Meanwhile, a small chunk of your bill will cover what are called distribution charges, which are costs incurred by installed electricity wires that provide power to your household. Around 11% of your bill will go towards government programs that have been designed to reduce our negative impact on the environment by encouraging more responsible use of energy and attempting to slow climate change. Finally, a very small percentage covers the cost of high voltage transmission networks.
So, although there is room for debate about whether electricity providers are enjoying oversized profits, the main reason behind the increase in your bills is the aforementioned government schemes that are aimed at helping our nation to become more environmentally friendly.
The results we can expect to see from a price freeze
You will probably have heard some electricity suppliers claiming that we could end up in serious trouble if prices are fixed for a year and eight months. While this view is often characterised as a claim that we will lose power in our homes, the real worry relates to the fact that there will be a shortfall in energy production all over the Unite Kingdom. This shortfall will result from the fact that power plants will be decommissioned, and (due to the price freeze) we will arguably lack the funds to support the construction of newer, more environmentally friendly power stations.
However, Labour counter this concern by saying that it is an over-exaggeration and by insisting that electricity providers have been overcharging their customers (indicating that they don’t really need this much money to secure effective energy production in the future).
As we move closer to the next general election, we are likely to get a better sense of who is on the right side of this debate.
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