Cameron’s mathematically impossible Energy Bill
Of course the back-pedalling is going on furiously, but this is what Cameron said about the forthcoming Energy Bill:
I can announce, which I am sure the hon. Gentleman will welcome, that we will be legislating so that energy companies have to give the lowest tariff to their customers….
Leaving aside the question of whether such legislation will actually raise or lower prices overall, it does amuse me that Cameron is proposing mathematically impossible legislation.
There simply is no such thing as a lowest tariff.
A simple example might help Cameron get that.
Take an energy bill of £1,200 for the year. If that is paid off quarterly at £300 per quarter, and the money not paid stays in a customer’s deposit account at 2%, then the customer will earn around £16 in interest (I’ve done the quick maths).
That’s £16 in interest the energy company could have had, if it had all the cash up front, as opposed to the £8 it does get by getting the money in quarters (in the rather unlikely event that its interest rate on its deposit is also 2%).
So the energy company offers to knocks £4 off the overall bill in return for an upfront payment.
Q: Which is cheaper? The £1,2oo quarterly bill or the £1,116 upfront bill?
A: It depends.
Life is complicated, and what’s cheapest for a customer depends on the opportunity cost, with the amounts at stake significantly higher than in the simple example enough. Will taking a higher price in total allow other purchases to be made before those prices rise? Will deferring payment allow the steepling credit card bill to be managed better, even though that makes the energy cost bigger?
But Cameron’s statement seems to suggest that he understands none of this.* Nor does he appear to be any good at maths.
In the end, I don’t think we will get a mathematically impossible Energy Bill, but Cameron had a go, and I imagine the fun the lawyers would have had.
* This isn’t to defend the energy companies’ apparently deliberate use of a confusing number of tariffs, but it is to suggest that the government might be better employed tackling the root cause of high energy bills (and the deliberate targeting of high tariffs at pre-payers, which is a perversion of the example above) rather than pussy-footing around the edges with stuff it doesn’t even appear to understand.