The truth about energy bills?

July 20, 2015

Returning to my desk this morning after a long weekend away, I thought I would run through some of the commentary on the report we published last week on energy bills. In the main, we have had lots of positive feedback from a wide range of commentators. However, there were a number of challenges to the report that I thought I should respond to.

The first (widely reported) criticism of the report came from Lord Adair Turner, the former Chair of the Committee on Climate Change. He agrees with our position that “the government should certainly strive to achieve decarbonisation at the lowest possible cost”. But he argues that “the cost of clean energy has already been increased by policy tinkering – so it is somewhat ironic that a report purporting to advocate lower prices should be proposing yet more tinkering.”

This is an extremely interesting position on a number of levels. Lord Turner is essentially arguing for maintaining the status quo, which would be fine if the status quo was delivering objectives satisfactorily, but as our report shows this is clearly not the case (at least on cost grounds). Moreover, Lord Turner has himself proposed quite a bit of ”tinkering” in the past, as evidenced by the policy letters he wrote to government ministers during his tenure at the CCC. In fact, there is quite a lot of common ground between his positions and the recommendations in our report – namely his support for the use of auctions in allocating renewables support, and the need to do more on energy efficiency (particularly ECO and the Green Deal).

Another notable critique of the report came in a blog by Green Alliance, which was billed as “the truth about government and energy bills.” This was portrayed in the media as undermining our analysis, but in fact contains inaccuracies in places, and in other places simply amplifies the conclusions of our report.

Green Alliance contends that Levy Control Framework costs only make up 3% of the bill, and that “the claim that government controls a large proportion your energy bill rests mainly on the costs of electricity and gas networks”. The first bit is nearly right – the LCF costs amounted to £60 in 2014, or 4.5% of the average bill (Source: Ofgem). If you add other policy costs (such as ECO) then this rises to 7%. Network costs represent a further 22% of the average bill, and notably have risen by £57 per household since 2009. For precisely this reason we devote quite a bit of our analysis to network costs, and suggest that they deserve greater scrutiny.

Green Alliance claims that “support for low carbon power isn’t the reason bills are rising”, quoting 2013 analysis from the Committee on Climate Change. It is simply not true to say that support for low carbon power is not adding to bills. Overall, policy costs increased from £26 per household in 2009, to £89 per household in 2014, an increase of £63 (Source: Ofgem). Of the £89 per household now, £48 relates to low carbon power. Green Alliance and the CCC are correct in saying that earlier rises in bills were dominated by wholesale costs, but more recently (i.e. since 2009) wholesale costs have not been a driver of bill increases, whilst policy and network costs have together pushed up bills by £120 per household. Moreover, data from DECC shows that low carbon subsidies alone will add a further £48 per household (in real terms) between 2014 and 2020 – another significant increase.

Green Alliance claims that “we haven’t actually overspent” against the Levy Control Framework yet, and that government has so far only committed £3.3bn. Again, this is simply not true. LCF spending exceeded the cap in all of the last three financial years, and reached £3.8bn in 2014/15 (Source: DECC). If you add to this the commitments already made under the CfD and FID Enabling mechanisms to date, then our analysis suggests that £5.6bn has been committed. Add to that the implicit commitment made to projects currently under construction under the Renewables Obligation, and you get an even higher number. In short, low carbon subsidies are already going over agreed budgets, and there is relatively little wriggle room within the LCF cap between now and 2020. The area in which DECC can most easily make savings against its original budget is the small scale Feed in Tariff – since tariffs can be changed for future projects.

Green Alliance argues that the overspend against the LCF is a “good thing”. I find this challenging to accept. The government has set a budget to deliver a set of policies, and then discovers that this budget is likely to be exceeded by as much as 20%, using up the entire contingency. I agree that it is not uncommon for infrastructure projects to go over budget, but it is not a “good thing” to spend your contingency. Some of the overspend relates to offshore wind farms generating more than DECC was expecting: this situation could have been averted had DECC used data provided by the industry some 18 months ago. Another chunk of overspend relates to deployment of rooftop solar being higher than expected: again, this could have been averted had DECC designed a mechanism with greater cost control, and reacted more quickly to the rapid fall in solar panel prices.

A significant positive from the last few days is that there is now a healthy debate around energy bills, and in particular the impact of government decisions on what people are paying for energy. It hasn’t taken Government long to respond to this new narrative, with media reports suggesting that the Government is now considering a review of all subsidies paid for by consumers.

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