Are council-backed entrants the answer to the fuel poverty problem?

Are council-backed energy companies the answer to solving the fuel poverty crisis? David Blackman investigates.

Nottingham has a big fuel poverty problem. According to the government’s latest breakdown of fuel poverty statistics by local area, 15.8 per cent of households in the east midlands biggest city in 2015 were fuel poor – the sixth highest proportion for any local authority in the country.

Tackling this problem by offering affordable energy supplies is one of the key aims of the Robin Hood Energy, which became the first of a new breed of municipal energy companies when it was founded by Nottingham council three years ago.

The intervening period has seen a rash of councils jump on the energy company bandwagon. Bristol Energy has joined Robin Hood to become the second fully-licensed municipal energy supplier. A host of other councils have set up their own energy companies after entering into white label arrangements with Robin Hood. These range from Liverpool’s Leccy to Angelic Energy in the London borough of Islington – whose customers include Jeremy Corbyn. In addition, the Scottish government, the Greater London Authority and both Birmingham and Portsmouth councils are all looking to secure a full electricity supply license.

Big losses

Besides cutting local customers’ bills, the municipal companies set up so far aim to generate a return that will help to compensate councils for dwindling government grants.

However, on this score, municipal energy companies are not measuring up so far.

Just over a fortnight ago, Robin Hood revealed that it made a £7.6 million loss in the year ending March 2017. Together with the previous year’s losses, the council owned company is now £10.8 million out of pocket since it was set up. Bristol Energy too has reported heavy losses and is not set to break even until 2021.

Ryan Thomson is a partner at consultants Baringa Partners, which has advised a number of councils on their energy company plans. He says that they shouldn’t be judged yet on the yardstick of whether they are making a profit. “Most new entrants are looking at a four to five-year payback even if they are running very efficient operations,” he tells Utility Week. “I wouldn’t expect anybody to break even in the first three years: anything less than three years in the current market conditions is very optimistic.”

Lower prices

Robin Hood has said that is on course to break even around March when it is due to lodge its next results. Councillor Steve Battlemuch, the company’s chairman, says: “To be on course in two and a half years is pretty good going.” And as Robin Hood’s customer base continues to grow, its costs will come down, he predicts. “The bigger we are ultimately the lower the prices we can deliver.”

Birmingham council set up the world’s first municipal gas and water utilities in the late 19th century, ushering in an era when councils dramatically improved the quality of these essential services across the UK.

However, the Conservative group has pledged to halt the Labour-run authority’s plans to establish an energy supply company if it regains control of the council at May’s upcoming local government elections. Cllr Meirion Jenkins, a member of the council’s shadow cabinet, argues that the proposal is wrong in both principle and practice.

“I don’t think councils should be in the business of selling utilities when even the companies that do it find it a challenge,” says the Tory councillor. “The left will say that in the early days of Birmingham, it was the public sector that brought key utilities to the city but it was a very different world. When nobody had water or electricity you could take a view that it was appropriate for the state to pump prime that activity but now we have a large and complex energy market.”

Crowded market

And against the backdrop of recent energy supply company bankruptcies, he doubts whether it is a good idea for local government to launch new propositions into a crowded market.

Thomson says that the new municipal energy companies will face challenges standing out. “It’s a low margin business and getting harder to differentiate yourself.”

However, Peter Haigh, managing director of Bristol Energy, argues that the not-for-profit nature of his company’s business appeals to customers, and not just those from the company’s home city. “An awful lot of customers warm to the message. It’s important to them that the benefit is going to a community even if not their community.”

Battlemuch agrees: “We are here for the long term and providing a not for profit alternative. It’s just us and Bristol trying to do that: the rest of the market is pretty much for profit.”

But Jenkins is not convinced that setting up an energy supply company is the best way to help those in fuel poverty. “If the objective is to relieve fuel poverty there are much better way of doing that than setting up a Birmingham energy company,” he says, suggesting that it would be a better idea to offer subsidies to hard up customers.

Added to this, he warns that councils run the danger of “confused objectives”: while aiming to relieve fuel poverty, the new companies are seeking to generate a return for their local authority masters.

Community ownership

In the long-run, though, council-owned energy companies could really prove their value by backing projects, like heat networks, which is difficult for private companies working on shorter investment time horizons, argues Dr Alastair Martin, chief strategy Officer at demand response aggregator, Flexitricity. He says: “The value in community ownership and engagement gets stronger when they are involved in common good infrastructure.”

It’s a vision that Birmingham’s Victorian city fathers would recognise.