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UK energy prices – how not to cut them

by Dave Elliott

As we try to respond to climate change it seems inevitable that energy prices will increase. However this may not be the full story, unless, in a panic, we cut back the long-term development of renewables and energy efficiency.

So far, UK electricity has been relatively cheap:  in 2012, the UK was at No.16 in the EU 27’s ranking of electricity cost (including taxes), 17% below the EU average. We’ve had cheap North Sea gas! 

But of late we have been treated to a media frenzy about rising consumer prices, sometimes attributed to the impact of green surcharges. It is true that prices have been rising, but most of that has been due to the rising cost of imported fuels, although they are disputes about whether the energy companies have been adopting overly aggressive hedging strategies in relation to future energy prices, with current wholesale prices not rising as fast as retail prices:

However it is clear that the green surcharge part is only small, put at about 8-9% of the total, around £112 p.a. for a typical duel-fuel bill, with about half of that due to support for renewables, mostly via the Renewables Obligation (RO), but also the much smaller Feed In Tariff  (FiT) scheme for micro-gen.

As more renewables are installed, this proportion will initially rise, but,  as the market builds and the technology improves, there will be cost reductions, and longer term the overall cost of energy should reduce, since there would be less use of increasingly expensive fossil fuel. This view was put forcefully in a Bloomberg article which claimed UK prices will rise relative to those in Germany because of the UK’s relatively slow up take of renewables:   We will still have to buy in expensive fossil fuels.

On this view, green energy subsides can be good value for money. Whether the other subsides are also helpful is less clear. The overall picture is quite complex: for details, see But a breakdown of UK support for energy by Oxford Energy Associates  provided a helpful summary. It found that total energy subsides were £15bn p.a, some being raised from tax, some from consumer surcharges (RO, FiT). Gas does well. Nuclear also, including insurance liability cover (the government in effect underwrites liabilities of  >£1.2bn), and the legacy waste costs (£2.3bn p.a). Even leaving out the £5bn bailout of British Energy, the £1bn or so for the failed MOX project and the £10bn loan guarantee and maybe £1bn p.a inflation index linked CfD deal with EDF, nuclear gets nearly as much as all the renewables –which receives about 20% of the total.

So there is some way to go before renewables start costing a serious amount, relative to the other energy options, in terms of direct government spending. For example, the Green Investment Bank has only invested £635m in 11 low carbon schemes so far, including wind and Energy from Waste. And DECC says the renewables CfD should only add around £28 extra to annual household energy bills by 2020. That may be an underestimate. Certainly the costs will rise as renewables expand.  But so will the cost of importing fossil fuel. Last year, RWE npower claimed that the government’s green energy policies would add more than 19%, around £240 p.a per bill, by 2020: That seems over the top- unless we just stay with fossil fuel:

Nevetheless,  a political campaign against the green subsidies has continued.In October, PM David Cameron was reported as saying ‘We need to roll back some of the green regulations and charges that push up our bills’. A possible target for cuts was the Energy Company Obligation (ECO), which aims to get the Utilites to help the fuel poor with energy efficiency upgrades. It has been claimed (by the IPPR), that this scheme is not well targeted on those most in need and certainly the big energy companies did not like it. They claimed that it costs consumers £94 p.a. DECC said only £53 or 4% of average duel fuel bills, about the same as for wind and PV. But given that overall energy prices were accelerating,  politicians were impelled to do something. With a poll for the Daily Mail claiming that 60% of the public were against the green subsidies and only 18% in favour, hitting green subsidies was an obvious political option. Even if in fact cutting them wouldn’t cut prices much!

The scale of the real problem was clear. SSE put up its bills by 8.2%,  £111p.a average. It said ministers should shift the cost of subsidising green energy from bills to general taxation: ‘They can’t expect to have power stations replaced with new technologies, the network to be upgraded and nationwide energy efficiency schemes all to be funded for free.’ In response, as something of a free market holding operation, Energy Minister Michael Fallon said consumers should shift to cheaper rivals, while interventionist Labour stuck to its price freeze promise, arguing that the energy market needed to be ‘reset’.  As if the prove the point,  British Gas then imposed a 9.2% hike, npower 10%, with others following. In a surprising move, this was followed by ex-PM Sir John Majors suggestion that the government impose a windfall tax on the excess profits of the big six power utilities (put at £3.74bn)- to offset bills.  Seeking a compromise, Cameron was said to be planning to halve the green levies in energy bills, switching some green charges to taxpayers, while clearing the way for a windfall tax on suppliers before the next election. We now await the December Mini Budget from George Osborne.

The joker in all this is, arguably, the government’s commitment to nuclear. The £92.5/MWh CfD strike price offered to EDF for Hinkley won’t impact on consumer prices until the plant starts running, perhaps in 2023, if the deal goes through. But then the CfD surcharge, and the other forms of support being offered to EDF, could amount to more than all the green energy subsidies put together. Moreover the nuclear CfD contract  runs for 35 years- locking consumers into paying for it until 2058, assuming a 2023 start-up. DECC claimed that the UK nuclear programme would cut average bills by £75 p.a from what they would have been otherwise by 2030, presumably on the argument that, as with renewables, it would avoid importing expensive fossil fuels. But by 2023, on land wind and solar PV are likely to be cheaper than the Hinkley plant and certainly by 2030 (much less 2058), a wide range of renewables should be cheaper.  At that point, with an assumed 60 year life, Hinkley C will still have 53 years to run! If any other new nuclear plants follow Hinkley in the mid 2020s or beyond, they might be a bit cheaper. DECC seems to think an EPR at Sizewell would need a £3/MWh lower strike price-3 % less. But the cost of renewables is likely to fall much faster than that. Indeed, as I noted in my last post, the Solar Trade Association has suggested that PV solar could be cheaper than Hinkley by 2018!

Dumping the nuclear programme would not have an immediate impact of consumer prices, and, to ensue carbon reduction targets are met and energy security maintained, it would have to be replaced by expansion of green energy sources, and/or a stronger commitment to energy efficiency.  But those are exactly the options that the currently proposed subsidy cuts aim to weaken.

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