Consumers are paying too much for their energy because of “excessive” green taxes added to bills, a damning Government-commissioned report has found.
By Paul Homewood
Dieter Helm’s report about energy pricing is now in, and it makes highly embarrassing reading for the government.
This Telegraph article is intriguingly co-written by our friend Jillian Ambrose and the Political Editor, Gordon Rayner (the latter probably keep her honest!)
A series of “spectacularly bad” decisions by ministers have “unnecessarily burdened” households and businesses with higher green energy subsidies than necessary, according to Prof Dieter Helm, of Oxford University.
The cost of renewable energy – as well as gas, coal and oil – has fallen but the benefits have not been passed on because ministers locked the taxpayer into long-term contracts that overestimated those costs, Prof Helm found.
Green taxes will cost the average household almost £150 from next year, according to energy firms.
Prof Helm said this was “significantly higher than it needs to be” to meet the Government’s objectives of cutting down on the use of fossil fuels and promoting renewable energy.
He was asked to undertake the research after Theresa May, the Prime Minister, vowed to tackle “rip-off” bills. However, the industry expert placed the blame on the Government’s own policies.
“Significant institutional reform” should be brought in to reduce the Government’s role and allow the market to function efficiently, Prof Helm said.
Professor Dieter Helm was asked to undertake a forensic probe into each element of the energy system
His Cost of Energy Review said: “Each successive intervention layers on new costs and unintended consequences. It should be a central aim of Government to radically simplify the interventions, and to get Government back out of many of its current detailed roles.”
Green energy taxes, which were introduced as part of the 2008 Climate Change Act, have caused controversy ever since because some MPs regard them as “regressive”, penalising those who can least afford them.
There are also divisions over whether the levies are justified, particularly with respect to subsidies for wind farms, with opinion split over whether they are an unnecessary blight on the landscape.
In August the Office for Budget Responsibility warned that the cost of the subsidies would more than treble over the next five years, from £4.6 billion in 2015-16 to £13.5 billion in 2021-22.
The costs of “decarbonisation” account for around 20 per cent of typical electricity bills, according to the report. Consumers will have paid well over £100 billion by 2030, and Prof Helm says that “much more decarbonisation could have been achieved for less; costs should be lower, and they should be falling further”.
He said ministers’ forecasts of future energy costs had been far too high, but “many of these excessive costs are locked in for a decade or more, given the contractual and other legal commitments governments have made”.
In particular contracts had been given to “early stage” wind, solar and biomass companies whose costs had since been hugely undercut by other firms using much more advanced technology, Prof Helm said.
He said energy firms should be forced to declare their profit margins on bills and also called for the cost of existing contracts to be ring-fenced into a “legacy bank” and shown separately. The legacy charge should not be paid by heavy industry, he suggested.
Gareth Stace, director of UK Steel, said a “persistent and sizeable gap” existed between energy costs in Britain and competing markets.
The review is the second major report to criticise government energy policy in recent years after the Competition and Markets Authority dismissed many of the early claims of market abuse made against energy companies. Instead it warned that many policy decisions had harmed competition.
Greg Clark , the Business and Energy Secretary, said: “I am grateful to Professor Helm for his forensic examination. We will now carefully consider his findings.”
As the comments in the Telegraph make resoundingly clear, the real problem is the Climate Change Act and successive governments’ obsession with decarbonisation.
Helm makes several recommendations, including:
- Feed-in tariffs, contracts for difference and the capacity market auction should all be merged into a unified equivalent firm power (EFP) capacity auction. Low-carbon generators would be forced to bear the costs of their intermittency.
- The legacy costs of the renewables obligation, feed-in tariffs and contracts for difference should be separated out, ring fenced and placed in a “legacy bank”. They should be charged separately on customer bills and industrial energy users should be exempt.
- The government should establish an independent national system operator (NSO) and regional system operators (RSOs) under public ownership. They should take on a number of duties currently undertaken by distribution network operators (DNOs) and Ofgem.
- The RSOs should be responsible for securing local energy supplies and should do this by contracting out system requirements. This process should take the place of periodic reviews and price caps under the RIIO framework. DNOs would effectively become contractors – “one of a number of competitive suppliers”.
- Carbon taxes and prices should be harmonised by setting a universal carbon price across the whole economy. There should be a border carbon price to prevent emissions being exported.
- Separate licenses for generation, supply and distribution should be replaced by a simpler, single license, at least at the local level.
- Standard variable tariffs should be superseded by default tariffs based on an index of wholesale costs, the fixed cost pass-throughs, levies and taxes, and a published supply margin. The government’s proposed price cap should take the form of a cap on the supply margin.
- The government should give an annual statement to parliament, setting out required capacity margins and guidance for the NSO and RSOs.
Most seem to be to be simply rearranging the deckchairs, whilst at the same time adding even more bureaucracy.
His idea that low-carbon generators should bear the cost of their intermittency is an interesting one, but as these will simply be passed on in any auction price, consumers will surely still end up paying.
As I have been pointing out for a long time, signing up long term contracts for low carbon generation at high prices, rather than waiting for technology to deliver lower costs was always a huge mistake. But, unfortunately, we are now stuck with these costs.
If the government is serious about stopping electricity bills rising even higher in the next few years, it only has one serious option – put an end to all new subsidised contracts for renewables, and allow the market to operate freely.
Government accused of underestimating CfD costs
Aurora Energy Research claims true subsidy costs could be £80 million a year higher
By Jamie Hailstone
The government has been accused of underestimating the subsidy costs in the recent Contracts for Difference (CfD) by almost 50 per cent.
A briefing note by Aurora Energy Research claims the government’s methodology for forecasting future subsidy payments appears to underestimate the likely cost by almost £80 million a year.
And the note warns unless it changes its methodology, the government also risks “overspending on future renewables auctions”.
Last month’s CfD round awarded subsidy contracts to 3.2GW of offshore wind with a strike price of £57.50.
The note states that under these contracts, the government is obliged to pay a top up between the price the plant receives in the wholesale market when it generates and the strike price.
It adds the department of business, energy and industrial strategy (BEIS) currently calculates the subsidies as the difference between the strike price and its forecast of the average wholesale price.
But the “capture price” that windfarms actually receive is lower than the average wholesale price.
It claims BEIS forecasts the subsidies to the offshore wind allocated in last month’s CfD round to be £176 million per year, based on the difference between the strike price and the baseload price.
Aurora estimates if capture prices are used to estimate subsidy payments then the CfD bill increases to £261 million a year instead – an increase of almost 50 per cent.
The executive director of RenewableUK, Emma Pinchbeck, said the Levy Control Framework (LCF) urgently needs reform, so that it can better manage the “staggering speed with which the energy market is changing”, but added it is important to note that the issues with the LCF are “basically an accounting problem that occupies the Westminster bubble”.
“What is counted as market price or as top-up payment yoyos with wholesale price fluctuations, but crucially the total amount consumers pay doesn’t change,” said Pinchbeck.
“Offshore wind costs have plummeted spectacularly. The strike prices were the result of a fiercely competitive auction and are lower than the cost of other new generators like gas and nuclear. While we know the LCF is far from perfect, overall consumers will benefit from ever-cheaper renewables.”
A BEIS spokesman said the CfD scheme is based on “robust estimates and sophisticated modelling of future wholesale energy prices over the 15-year contract period”.
“We regularly review these to ensure that we provide the best value for bill-payers,” added the spokesman.