The National Audit Office (NAO) scrutinises public spending on behalf of Parliament. With a focus on energy, water and telecommunications, the report produced by the NAO looks at the impact on consumer bills of infrastructure investment. This page provides a brief outline of that report:
The significant investment that is needed in the UK’s utilities infrastructure means consumers’ energy and water bills will keep rising until at least 2030 – and it is the poorest homes with the lowest income that will be hardest hit. Whilst there have been some good initiatives in the energy sector, the government and regulators do know how much the new infrastructure will cost consumers or whether they will be able to afford the additional costs.
“Government and regulators do not know the overall impact of planned infrastructure on future consumer utility bills, or whether households, especially those on low incomes, will be able to afford to pay them. It seems critical to know ‘how much is too much’, based on reliable information.” Amyas Morse, head of the National Audit Office, 13th November, 2013
What investment is being made, and why?
The government’s 2012 National Infrastructure Plan has identified an estimated £310bn of planned investment in UK infrastructure. Such heavy investment in new infrastructure is needed, mainly to tackle climate change and ensure energy security; comply with environmental and public health standards; maintain and replace ageing infrastructure; and cope with rising demand from a population expected to grow 11% by 2030.
Why should this affect my energy bills?
67% of the cost of the investment is expected to be paid for by the private sector, a cost that would ultimately be repaid by consumers through increased utility bills. Energy and water bills have already been rising faster than incomes. Between 2002 and 2011 energy bills rose 44% in real terms. This is a particular concern for those households with the lowest 10% of income, which in real terms fell by 11% over the same period. Low-income households spent an average 15% of their income on energy and water bills in 2011 and the Department of Energy & Climate Change estimates that 11% of households are ‘fuel poor’.
High levels of expected investment in new infrastructure mean that energy and water bills are expected to rise further still. The average household energy bill in 2011 was £1,157 and is projected to rise 8% to £1,255 in 2013 (2012 prices). The Department of Energy & Climate Change’s central projection is for an 18% (£221) increase in energy bills, in real terms by 2030.
Who are the decision makers?
With over two-thirds of the total investment expected to be financed privately, new infrastructure is ultimately a private sector investment choice. However, government and regulators take important decisions that can influence the impact on consumers. These decisions need to be informed by good information on the long-term impact on bills, and there needs to be an understanding about the affordability implications for different groups of consumers.
What is being done to ensure affordability?
There have been efforts to assess the financial impact and affordability of bills in the energy sector. However, there is no consistent approach across sectors to forecasting bills or measuring affordability, and a lack of clarity about who is responsible for assessing affordability in each sector. DECC has done significant work to assess the impact of its policies on energy prices and bills. Its projections are based on complex models that are broadly appropriate for assessing the impact of energy policies on bills. However, there is an inconsistency between the amount of investment the private sector is currently planning, identified in the National Infrastructure Plan, and the amount of investment DECC’s models predict is needed to meet government objectives. DECC’s models currently predict around three quarters the level of investment that is reflected in the National Infrastructure Plan. They also found weaknesses in the models’ quality assurance, which the Department is working to address.
There has been no assessment by the government into the overall impact of infrastructure on future bills or whether those bills will be affordable. Gaps in analysis, and the lack of a common approach to measuring affordability, mean that the government does not have an overall picture of affordability, either for the average household or for those on low incomes.
Ofgem and Ofwat are placing the onus on companies to innovate and report on results. It is imperative that regulators therefore scrutinise what companies tell them. Regulators will need to ensure there is proportionate, independent verification of costs and of physical assets.
Do consumers have a voice?
Consultation with consumers about new infrastructure and the impact on bills is improving, although more could be done, especially by central government. Regulators recognise the importance of reflecting issues that matter to consumers in decisions made on their behalf. In 2008, Ofgem established ways to enable consumers to scrutinise company business plans and it continues to develop its consumer research.
Infrastructure UK has had very limited engagement with consumers in its work to plan and prioritise investment and secure value for money in infrastructure. The government and regulators have led several initiatives to improve value for money, but need to better coordinate their work across sectors. Within sectors, we found some departments and regulators collaborating with private companies to address the high cost of UK infrastructure. However, coordination across sectors is hampered by limited resources and the need for unanimous support of all regulators to take any decisions. There is no clear leadership on activity across sectors.
A full version of the report is available here.