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Gas power could push up energy bills, says Committee on Climate Change as government gives go-ahead to fracking

  • 13 Dec 2012, 15:55
  • Robin Webster and Christian Hunt

The Committee on Climate Change's (CCC) new report warns that electricity bills could be £600 higher in 2050 if the UK relies on gas rather than switching to a low-carbon power system. But on the Today programme this morning John Humphreys accused the head of the CCC of "disregarding" the potential impact of cheap shale gas on lowering energy bills. As the UK's energy future continues to look uncertain, we look at the CCC projections.

Energy bills up to 2020

In the report, the CCC reiterates its earlier assessment that green policy measures will add around £100 to consumer energy bills by 2020.

Energy efficiency measures will reduce bills a bit, but increasing wholesale energy costs, costs from environmental policies and the cost of paying for upgrading energy transmission networks will push bills up overall.

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The CCC points out that households which rely mainly on electricity for heating will see a bigger impact - up to £400 (See page 27). Policies will be needed to limit this effect, the CCC say.

It's important to note that this applies to around one in ten households - because we've seen it misreported before.

Energy bills after 2020

The CCC argues that after 2020 switching to renewables and nuclear will result in lower price rises for consumers than relying on fossil fuels - if a rising carbon price increases the costs of fossil fuels. These figures aren't explained in the report - they presumably will be in supplementary information the CCC tells us it will be publishing this week.

The report projects that household energy bills will increase by £25 between 2020 and 2030 if the power sector is largely decarbonised. If it's not, household bills would increase by £50 over the same period as a result of the carbon price. If gas prices rise, bills could increase by another £70 on top of that.

£600 extra?

In its press release, the CCC says continued reliance on gas "carries the risk" of electricity bills being "up to £600 higher than under a low-carbon system over the next decades".

The use of the slightly vague phrase "over the next decades" caused some confusion, with the Guardian suggesting that consumer energy bills would be £600 higher by 2020. This has now been corrected online.

Making projections to 2050 is obviously difficult. It's important to note that the £600 figure is at the higher end of a spectrum of possible price rises the CCC suggests. We've pointed out before such soundbite figures inevitably rely on a particular set of assumptions, which are usually missed out of press releases and subsequent media reports.

The report itself doesn't detail the figure much further, but a CCC spokesperson directed us towards Figure 5.4 in the report, which compares how much electricity will cost under a set of different future scenarios. Red scenarios are gas based, green are low carbon, and the scenarios differ in whether gas and carbon prices are low, medium or high:

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The spokesperson told us:

"...the difference in wholesale electricity price in the low-carbon world (central technology prices) and the gas based world, high carbon and gas prices, is 18.1 p (8.3 compared with 26.4) An extra 18 p/kWh for a household consuming 3,400 kWh per annum is over £600 per year."

This high-cost scenario depends on two key assumptions about the future:

A rising carbon price

Perhaps the most important assumption the CCC makes is that we are heading into a "carbon-constrained" world. Its projections assume that carbon prices will continue to rise over the next few decades as carbon emissions are reduced.

Given the slow progress of the international climate negotiations, this seems quite optimistic. But the CCC's role is to act as an advisor to the government on how it can deliver on the Climate Change Act, and the report should be read in the context of the Act's requirements to cut UK emissions 80 per cent by 2050.

The CCC models the impact of three different carbon prices - low, medium and high. The low and medium projections are based on the government's projections. The CCC's medium assumption is that carbon costs will rise to around £200 per ton of carbon dioxide in 2050.

The highest projection is based on modelling undertaken for the CCC by University College London (UCL). According to the report this:

"...suggests that carbon prices in 2050 could reach around £500/tCO2 even with an active global carbon market taking advantage of trading opportunities to minimise global abatement costs"

The three carbon price projections are illustrated in the following graph:

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It's worth pointing out that the highest carbon pricing (UCL) scenario is significantly higher than the government scenarios, and it's this scenario which underpins the £600 by 2050 figure. £500 per tonne is a high carbon price. We haven't looked at the modelling in detail, but should you wish to scrutinise it, figure 3.2 on page 17 of the UCL report is the source.

To put this in context, the carbon price has stood at around £5 per tonne of carbon in 2012, or £18 per tonne of carbon dioxide. The CCC says that the government projects the carbon price will rise to £32/tCO2 in 2020 and to £76/tCO2 in 2030.

Gas prices

What about cheap gas? On the Today programme this morning, John Humphreys accused the chief executive of the CCC, David Kennedy, of "disregarding" the potential effect of cheap shale gas in the CCC's projections.

Back in May, the International Energy Agency (IEA) released a special report examining what would happen to global gas prices if there was a significant investment in producing shale gas around the world. In its "golden age of gas" scenario, it found that shale gas would have "far reaching consequences for global energy markets" and bring down gas prices in the States - but it would have less impact in Europe.

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The IEA's projections for European gas prices are broadly comparable to DECC's 'central' gas price projections, as shown in the CCC's report:

So Humphreys is right that the top-line figure of a £600 price disregards the potential impact of shale gas - it is a high end prediction, based on a high gas price scenario.

A high carbon price means gas is expensive

The modelling the CCC used to support their high carbon price level in 2050 is beyond our ability to analyse. The CCC tells us it will be publishing the supporting calculations and other modelling their assessment is based on this week. It's a shame that it wasn't published with the report - it will be no doubt picked over in some detail in the coming days.

The £600 headline figure rests on substantial assumptions - that gas prices won't fall, and that the carbon price will rise very dramatically as we approach 2050. It should clearly be taken as one end of the spectrum of possibility.

But it's worth pointing out that the analysis seems to indicate that even under a future where there is significant expansion of shale gas around the world, it could still be cheaper for the UK to switch to a low carbon energy system, if the carbon price continues to rise.

It may not seem that surprising that in a hypothetical future where gas prices are high and there's a high carbon price, running an energy system on unabated gas is expensive. This is presumably the point of the report - if we tackle climate change, gas will be an expensive way to run an energy system in 2050.

There are some good points made about the £600 figure and carbon capture and storage technology on the Carbon Counter blog.

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