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Is Policy Exchange playing to the tabloid agenda on renewables?

  • 18 Jan 2012, 15:00
  • Robin Webster

Yet another report has been released today by a right-wing think tank attacking the cost of developing renewable energy technologies. This time the top-line finding, presented in media-friendly form, is that "renewable energy will cost households an extra £400 a year" (the actual figure they come to is £415).

So far, this news has been given a fairly muted welcome by the media, and the government has responded (rather irritably), labelling the report "flawed" and "not credible".

However, it's a fair bet that this will gain some more traction later on in the day, and if it's in the Daily Mail tomorrow we wouldn't be shocked, shall we say.

The report is by Policy Exchange, an influential think tank closely linked to the David Cameron project that promotes free market solutions to policy questions.

Over recent months they have consistently argued against various parts of the government's green agenda, suggesting that free market policies like the Emissions Trading Scheme would work better, and be cheaper than other policy measures like feed-in tariffs. Unlike some other players in the energy debate, however, they aren't a fly-by-night outfit, so you'd expect their reports to be pretty sane and substantive.

In assessing costs, Policy Exchange have taken a similar approach to other recent work by, amongst others, the TaxPayers Alliance and Civitas. They attempt to assess the full impact of carbon and energy policies on households rather than just looking at their impact on energy bills. They go further, arguing that the government's approach to assessing the cost on energy bills is "misleading".

A "government source", which spoke to BusinessGreen, was less than complimentary about this approach, arguing that it is just one of many similar reports which make bold statements which "don't quite stack up" when the assumptions behind them are analysed. With this in mind, it's interesting to have a look at what some of those assumptions are.

A significant chunk (45%) of the £415 comes from what are called 'pass-on costs' - where businesses experiencing higher energy costs pass a proportion of those costs onto consumers by raising the price of the products and services they sell.

The report says:

"About 70% of UK electricity is consumed by the non-household (business) sector, which also pays a share of the costs of renewable energy subsidies. We assume that 80% of the renewable subsidy costs on non-households are ultimately borne by households. This amounts approximately to an additional £185 a year per household by 2020."

£185 is 45% of Policy Exchange's total estimate of a £415 cost. It's difficult to interrogate how reasonable the figure is in the report because it rests on a number of unknowns and Policy Exchange don't explain how they arrived at it.

It does raise a number of related questions - for example, will businesses always respond to rising energy costs by putting up their prices? What if they are working in a competitive sector and can make savings elsewhere? What proportion of a product or service is accounted for by the cost of energy? If you're smelting aluminium, it's probably a lot. If you're a blogger, (for example) it probably isn't.

Author Mark Lynas has taken a look at some of the cost issues in the report here, (with a particular focus on offshore wind). Simon Less, the author of the Policy Exchange report, responded on Lynas' blog, including having this to say on pass-on costs:

I refer in the report to five impacts that higher energy costs for a business could have: higher consumer prices, lower employee wages, lower shareholder (much of it pension fund) returns, higher prices to foreign customers and (potentially) offsetting by productive efficiencies. On the basis that these are probably in order of scale and most of the first three ultimately hit households, I consider 80% is a reasonable assumption.

In our view doesn't really answer the questions above and we'd be interested to hear the thinking on why 80% is a reasonable assumption. Otherwise, this is a pretty opaque figure.

An important point on equity

There is a very interesting point made in the report about equity which is worth paying attention to. The government argue that although the price of energy may rise because of a shift to renewables, the average household will see its energy bill go down, relative to what it would have been, as householders take advantage of energy efficiency measures.

The PX report states that

"According to the documentation accompanying Chris Huhne's annual energy policy statement, only a third of households are expected to be able to benefit from at least one insulation, renewable energy or rebate measure by 2020. For the poorest households (in the bottom three expenditure deciles) only slightly more - 40% - of households could benefit from at least one of these measures."

If this is right, it makes DECC's claim that energy bills will on average go down as a result of energy efficiency measures a bit suspect, as many households will not benefit. This will fall harder on poorer sections of society.

This seems to reflect an argument which has been raging in the pages of the Guardian over the last week or so, about the impacts of the Government's 'Green Deal'. Poorer households may be less likely to be attracted by measures to help them get a loan to improve their household's energy efficiency. Will they really want to take on debt in order to pay up-front costs, even if it could save them money in the longer term?

Again, if DECC want to make their calculations stack up, they have to make their proposition on energy efficiency believable and ensure that they are adequately targeted at the poorer section of society. So far they haven't managed to convince.

What are Policy Exchange arguing for?

The report says that

By clarifying the full impact on households in this way, it does not mean that Policy Exchange is arguing against the importance of spending money on reducing carbon emissions. Far from it. What we want to see are policies which can command sustained public support over the long-term timescales needed to address climate change.

In terms of reducing domestic emissions in the short term, the main policy which PX seem to support is the EU-wide Emissions Trading Scheme (ETS), which they argue is more cost-effective - "saving carbon emissions at a marginal cost of only £5-15 per tonne of carbon".

There are two points worth noting here - first, a significant chunk of emissions reductions through the ETS are delivered through 'offsetting' through the Clean Development Mechanism (CDM). The problems with the CDM are pretty well documented - "emissions reductions" delivered through the CDM may be cheap, but there isn't much evidence that they actually work.

Secondly, if Policy Exchange are right and we can meet emissions targets to 2020 by burning less coal and even more gas than we are currently are, this could make sense up to 2020.

Between 2020 and 2030 though, it might present something of a problem. The Committee on Climate Change suggests that we need to decarbonise the power sector by 2030 in order to meet emissions reductions targets. You can't do that by burning gas, barring substantial developments of CCS technology. And that really is expensive.

Finally, the PX report also expresses all of these costs - which are not added onto an energy bill - as though they were. The report says that

If these additional renewable subsidy costs to households identified by Policy Exchange are added to DECC's figures, then the total net cost (not just through energy bills) to the average household of carbon and renewable policies will be equivalent to 15% of the (without policies) energy bill.

They claim this is to compare with DECC's figures, but as the two exercises are quite different it doesn't make a lot of sense. We have our suspicions as to why this has been done, which revolve around giving tabloid newspapers the headlines they are after.

There's the rub. This reports focuses on the costs of shifting to a low-carbon economy, whilst rubbishing the benefits. It produces tabloid- friendly numbers for those who want to attack domestic climate policy. If, as they claim in the report, Policy Exchange really want to see policies that "command sustained public support over the long-term timescales needed to address climate change", they could perhaps start by not playing into a tabloid agenda that appears to be trying to avoid exactly this outcome.

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