Tuesday August 30th 2022
Why Not Tiered Energy Pricing to benefit Poorer Households?
The other day on BBC Radio 5`s “Wake up to Money” Shanti Kelemen from M&G suggested that one solution to the energy price crisis would be to introduce tiered tariffs for electricity and gas offering reduced unit prices to poorer households with lower energy consumption. This reminded me of Mexico where the electricity company is state-owned and monthly electricity consumption of less than 140kWh is subsidised at around a price of about Mex$1/kwh (supposedly through government generosity but in reality, paid for by higher consuming clients). Consumption greater than this is charged at a rate three times higher. The other benefit for the lower consumption user is that there is no standing charge, just a minimum consumption of 25kwh/month. But … there is the bearpit for higher consuming users – the DAC – Domestic Alta Consumo – if your electricity consumption averages more than 250kwh/month over the previous 12 months you are charged double the maximum tariff for the next year and only if you manage to reduce your consumption will you return to the standard tariff at the year-end.
140kwh is probably a lot less than most UK households consume but in Mexico there are still millions of poorer families who may only have a TV, fridge, lights, and a water pump. The latter is because there is insufficient street water pressure to lift the water above ground level. So houses have an underground tank and an electric pump to pump the water to a rooftop tank. Often the water pump consumes more electricity than all the other electrical appliances combined! However, 140kwh/month is perfectly adequate for most poorer households.
The DAC penalty for richer, higher consuming households is so great that there is a real effort to minimise energy consumption, and now that solar is cheaper the more affluent users install solar panels to reduce consumption to below the DAC trigger point. Of course, there is also corruption – well it is Mexico! Current and ex electricity company employees will offer you a “diablito” (little devil). To the less technical client, it is a high-tech gadget that halves electricity consumption, in fact, the “diablito” is just a wire shorting out the rear terminals of the electricity meter so only half the current passes through the meter. The trick is to have access to new electricity company meter seals – and of course, they are available for a price!
Many aspects of the UK energy pricing system really penalise poorer households through standing charges and higher tariffs for the users of pre-payment meters. Surely a more equitable solution can be found?
Monday August 29th 2022:
The Economics of Solar Panels
Energy costs dominate most financial forums at the moment including the Reddit forums UKPersonalFinance and FIREUK. One recent post was entitled “Solar panel vs investing” and the he writer used the example of a £6K solar system investment producing £25K of electricity over 25 years. He calculated this as equating to a 4.8% annualised return (my calculation makes it 5.5%!), He argued that this was a poor investment as higher return investments are available (he gave green investment financer Abundance Investment as an example of higher-yielding green investment opportunities). I suspect that the actual return would be even lower than his 4.8% if maintenance and replacement costs were taken into account. Hower a 3%+ inflation-linked yield with almost bond-like security is still pretty much unbeatable in our current economic environment. However, if the investment is looked at from the point of view of a retiree it becomes even more attractive.
Consider How Much You Would Have to Invest to Produce The Same Drawdown Income: £1000/year in saved electricity is equivalent to an identical tax-free income. A £25k stock market investment would be needed to produce the same income in drawdown assuming a 4% safe withdrawal rate (SWR). So in the example given of a £6K system even if maintenance and replacement costs over the 25 years doubled the total investment the return would be 100% higher than from drawdown and with less risk than a stock market investment.
Of course, how many retirees will be living in the same house for 25 years? Current evidence is that the cost of a solar system isn`t fully reflected in house selling prices. This will probably change in the future but maybe the calculation should be based upon a 10-year or so house ownership which would be almost as attractive given the reduced system maintenance costs.