Energy bills are back in the news, with the Office of Budget Responsibility calculating new figures for the cost of low carbon power, the Competition and Markets Authority investigating energy companies, and both IPPR and Policy Exchange releasing reports in the past few weeks. With so much to debate, and a lot of seemingly conflicting numbers to grasp, here are five things you should know:
1. The levy control framework (LCF) makes up three per cent of the average energy bill.
The claim that government controls a large proportion your energy bill rests mainly on the costs of electricity and gas networks, which make up around 22 per cent of bills. In contrast, efficiency policies, which reduce consumption, and therefore lower bills, make up around three per cent. Low carbon power, covered by the levy control framework, also makes up just under three per cent of the bill. So called ‘policy costs’ are, therefore, mostly due to networks, not low carbon power.
2. Support for low carbon power isn’t the reason bills are rising
Images of wind turbines juxtaposed with headlines about rising bills are misleading. To quote the Committee on Climate Change’s recent analysis, “the annual energy bill increased by 75% in nominal terms from £650 in 2004 to £1,140 in 2013 for the typical dual-fuel household. Of the £490 increase, around 80% was associated with rising costs of wholesale energy and system costs and therefore unrelated to low carbon policy.” These system costs include network costs, which is a vital distinction.
Although LCF costs are set to rise, even if we spend into its headroom (see more on this below), they should make up no more than nine per cent of bills by 2020.
3. We haven’t actually overspent – yet
The LCF covers levy spending up to 2020-21, and is due to rise to £7.6 billion. Modelling the LCF is complicated but, as it has only committed around £3.3 billion so far, the government can change policy to keep to its budget, including by following Policy Exchange’s advice to deploy more onshore wind, and by taking our advice to revamp energy efficiency policy (reducing the need for low carbon generation).
4. The LCF has headroom which is a good thing
The LCF was set at £7.6 billion with additional ‘headroom’ of 20 per cent, bringing its total value to around £9.1 billion. This headroom was built in because the government knew that aspects of LCF spending depend on three factors it has limited control over.
The main reason costs are projected to be higher than anticipated is that small scale solar has been more popular than expected. DECC can’t stop people from taking up FiTs directly, but it can reduce the support it provides, to match the rapidly reducing costs of the technology. This is difficult to get right because too little support will strand a popular industry delivering low carbon electricity at a rapidly reducing cost; but too much will reward people with spare roof space and spare capital.
The second reason is that offshore wind farms are generating more electricity than expected. DECC predicted that they would have a load factor of around 38 per cent, but the newest ones are generating around 45 per cent of their rated capacity. Support payments are tied to the amount of electricity generated, so this increases costs. However, because we will get more energy from each wind turbine, fewer will be needed to meet carbon budgets.
The third factor is that gas is cheaper than anyone anticipated. We can blame (or perhaps thank) Saudi foreign policy for this. The bad news is that this increases the gap between wholesale power and the strike prices guaranteed to low carbon generators. The good news is that gas makes up around half the cost of overall household bills, so reductions here really do reduce consumer bills: DECC’s latest reduction in predicted electricity prices alone would save consumers around £50 per year. In contrast, the additional cost of all three causes of potential overspending outlined above – if they were to occur – would be £20 per year.
5. Low carbon infrastructure has benefits as well as costs
We need to be careful not to overspend on decarbonisation, but the infrastructure built to help us decarbonise isn’t just a cost. As a recent Green Alliance blog post makes clear, infrastructure investment is a driver of GDP growth, and is the sort of spending the government has said it wants to encourage. All of the growth in UK investment between 2010 and 2014 was worth around £40 billion; low carbon investment over the same period also amounted to around £40 billion.
Of all policy areas across government, low carbon investment most closely resembles a long term investment plan, designed to increase economic growth. Reducing investment in low carbon infrastructure might cut a small component of energy bills, but it would also cut a major driver of UK GDP.