Forget the weepy campaign video and the tongue-lashing in the lift. The most interesting part of London’s mayoral campaign is actually an innovative energy policy: Ken Livingstone’s manifesto pledge to “establish the first ever London-wide Energy Co-operative.”
In 2011 the average London household spent 1140 on their combined electricity and gas bills when paying by direct debit, up 8.6% on the year before. Since high energy bills are a sure-fire way to get bad headlines, it’s no wonder that politicians are looking for ways to bring down costs. But given the structure of the UK’s energy markets and urban governance, there’s usually very little that local authorities can do besides encouraging their residents to shop around.
This is why Ken’s big idea, if it works, would be a significant change in the way UK cities approach their energy systems. By using a Transport for London energy supply contract to buy in cheaper energy from the wholesale market, the Livingstone campaign claims that London households could switch to the new London Energy Co-operative (LEC) and save around 130 per year. Per unit gas and electricity costs for the median industrial consumer are about half of what domestic customers pay so this certainly sounds feasible.
We can double-check the maths with the help of this factsheet (pdf) from the energy regulator Ofgem, which gives a breakdown of domestic gas and electricity bills. For both fuel types, about 35% of the price is fixed and covers metering provision, transmission and distribution charges, taxes and the cost of energy saving and climate change policies; the LEC would still have to pass on these charges to consumers.
The remaining 65% is made up of the actual fuel cost, the cost of running the business, and the profit margin. Recent Ofgem analysis indicates that operating costs account for about 11% of the final bill, and average net profit margins are around 4.5%. Assuming similar operating costs for the LEC, having access to cheaper fuels and operating as a non-profit would enable a potential annual savings of around 220 per household.1 Naturally there will be set-up costs and the operations may not be as efficient as existing suppliers, but expected savings of 130 are not unreasonable.
There are many obstacles before Ken Livingstone makes this experiment a reality, not least of which is getting elected. Furthermore a number of firms have expressed their reluctance to offer wholesale contracts to these types of bulk purchase schemes. The matter may eventually need to be settled in court.
But if it were to happen, this model could provide a significant disruption to the UK’s energy supply market. Not all UK cities currently have access to wholesale supply contracts via an entity like TfL (London’s largest single electricity consumer), but with the template in place, it could encourage them to think about how they might promote more affordable urban energy provision. And once started, these urban energy co-ops could expand to offer a range of improvements in energy efficiency, renewable energy supply, and customer experience. Elected mayors, if granted appropriate powers in this area, could be at the forefront of a renaissance of urban energy innovation.
Over a hundred years ago, modern energy services like gas and electricity began to emerge in cities worldwide, led by local firms and local governments. As the networks grew, the pendulum swung towards the centralized national grids we have today. Perhaps now’s the time for the pendulum to swing back the other way.
1 There are a lot of assumptions in this calculation. I’m only guessing at TfL’s costs for gas and electricity based on DECC’s commercial price survey and it’s hard to work out the exact cost of fuel within these prices, as Ofgem doesn’t provide a breakdown for commercial bills in the same way that it does for the domestic sector.