REA Comments on DECC Energy Bills Analysis

Government intervention means modern UK energy infrastructure and potential household savings

The Government’s revised analysis of the estimated impact of its energy policies on energy bills was published today [1]. The analysis makes clear the distinction between the cost of energy, and energy bills, which could be reduced by energy efficiency measures and investment in on-site renewables.

Overall the package of measures, under DECC’s ‘central fossil fuel’ scenario, is estimated to reduce household energy bills in 2020 by an average of 11%, or £166, compared to the ‘do nothing’ scenario.

REA Chief Executive Gaynor Hartnell said:

“The cost of energy may be rising but households and businesses can take positive steps to limit bill increases with efficiency measures and investment in on-site renewables.

“Predicting future fossil fuel costs in a volatile international market is fraught with uncertainties. Investment in energy infrastructure is essential, as is the switch to renewable energy. Government intervention on both new generation and demand reduction should save households money overall. That’s got to be good news for the UK’s future security and prosperity.”

The report attributes £112 of today’s household bills to current policy measures. This year (2013) renewable energy policies will comprise just a quarter of this figure (i.e. £27) [2]. The great majority of the policy costs are from energy efficiency measures, whilst most of the overall increase is due to rising gas prices [3].

The report makes clear that the wholesale gas prices have increased very substantially over recent years (see Chart 6, p. 22). With wholesale energy prices responsible for 50% of energy bills, UK households and businesses are very exposed to international fossil fuel price volatility. The central price scenario, on which the analysis is based, does not appear to reflect the likely rise in gas prices indicated by Ofgem CEO Alastair Buchanan’s recent warnings of a serious gas supply crunch. It shows gas prices peaking at 78p/therm in 2016, only 13% higher than the 2013 gas price (of 69p/therm). It also anticipates gas prices stabilising from 2018 at 72p/therm – up just 2% from the 2013 figure. However, a ‘high’ price scenario seems more likely, in which case average household bills will be 14% lower than they would have been.

The 2020 figures in the report are subject to huge uncertainties and do not clearly identify the anticipated overall cost of renewables policy support by 2020. The Electricity Market Reform (EMR) package does not distinguish between renewables and other low carbon technologies. It is also unclear whether the interaction of Contracts for Difference (CfDs) and the Carbon Price Floor (CPF) has been dealt with correctly. The increase in electricity wholesale price resulting from the CPF will reduce the cost of CfDs, as what gets given with one hand, will be taken with the other.

Gaynor Hartnell said:

“The CPF is a tax on pollution (polluter pays principle) that seeks to internalise environmental costs. Ideally the full costs to society of carbon emissions should be reflected in the price we pay for fuels and electricity. The CPF is the first small step in this direction. Ultimately this approach should supersede other more direct subsidies, but it should not be done too soon.

“Renewables deliver many other benefits, in addition to carbon savings. Very importantly they help with security of supply. With most renewable technologies there are no fuel costs, and we aren’t dependent on imports which leave us vulnerable in an ever energy-hungry world.”

It would also be helpful if the analysis distinguished between savings from energy efficiency and savings from on-site generation, as there is huge potential for businesses and households to save money by supplying themselves with renewable heat and power. Furthermore, the switch to renewables could also deliver up to 400,000 diverse jobs nationwide by 2020 [4], as well as greater price stability and national energy security.

Gaynor Hartnell said:

“We think the analysis overestimates the cost of delivering the renewables targets – particularly if Ofgem’s anticipated gas supply crunch hits the UK. Nevertheless this analysis should help to reassure households that the cost of modernising our energy infrastructure can be mitigated. But given the relatively low proportion of energy coming from renewables in the UK and our continued dependence on fossil fuels, households remain vulnerable to unexpected and significant bill rises well beyond the figures suggested in this analysis.”

The Renewable Energy Association represents renewable energy producers and promotes the use of all forms of renewable energy in the UK across power, heat, transport and renewable gas. It is the largest renewable trade association in the UK, with over 1,000 members, ranging from major multinationals to sole traders. For more information, see: www.r-e-a.net

Source: REA

For more information on: REA