Will households really pay £600 for green energy?
- 17 May 2013, 15:00
- Robin Webster
Party like it's 2011
It feels a bit like it's 2011 again. Exchanging different predictions for how much moving to a greener
energy system might be going to cost British consumers was all the
rage about eighteen months ago. Today, reports in the right wing
press claim Britain's green energy "folly" will cost consumers £600
a year by 2020.
Telegraph picked up on a press
statement from thinktank
Civitas arguing that green energy
subsidies will cost every household £600 per annum - or £16 billion
in total - by 2020. The figure is based on
calculation by the chief executive of
the Renewable Energy Foundation (REF), Dr John Constable.
How has the figure been created, and how does
it compare to DECC's?
REF has calculated the figure of £16 billion by
adding up the following cost estimates for 2020:
- cost of subsidising renewables through the the
- mechanism the
Renewables Obligation (RO) - £8 billion
or £307 per household;
- cost of upgrading and maintaining the power
network, and managing the variable supply of power from wind - £5
billion, or £192 per household;
- cost of the Carbon Price Floor - £1 billion, or £38 per
This makes £14 billion. REF adds VAT to get to just
over £16 billion.
The Department of Energy and Climate Change (DECC)
has issued a statement saying it doesn't recognise REF's number.
Altogether it suggests that the RO will add £63 to household energy
bills by 2020. Add on the costs associated with developing green
technologies - including a few with REF don't account for - and it
suggests subsidies will add about £200 to consumer energy bills by
The difference in the figures lies in the assumptions
DECC and REF have made to calculate the cost of renewables.
Passing on costs from business and
The government funds green energy subsidies by
allowing energy companies to add them to consumer energy bills. But
they're also added to the energy costs paid by businesses and
Some commentators argue that businesses will then pass
on those costs to consumers by charging more for their products and
services - so the government should take that into account when
calculating the costs households have to bear. In its calculation,
REF assumes thatall of the costs borne by business and industry
will be passed on to consumers. This accounts for two thirds of its
projected cost, or £400 per household.
But academics have challenged this view. Last year,
Dr Rob Gross of Imperial College London
labelled this approach "misleading in the extreme". He argued that
the potential for competition between businesses, changes to other
prices, and other changes to the economic cycle mean
"it is by no means obvious that a
tiny fractional overall cost increase will pass [from business to
consumers] - 100 per cent, 80 per cent, or at all".
Other thinktanks that have used the same approach
have estimated lower pass through costs. In August 2011, the
Taxpayers Alliance estimated that
businesses will pass on 80 per cent of the costs to consumers. In
June 2012, conservative thinktank Policy Exchange suggested that
about 70 per cent of the costs will be passed on to
The cost of upgrading the grid
REF's calculation also adds on £5 billion a year for
the "additional system cost" of wind power - that is the cost of
adding additional power lines to connect up wind farms, and
managing the grid so that it can cope with the variable supply from
The prediction is based on work by Colin Gibson, who REF says used to be
Power Network Director for National Grid. Gibson's work has
been used before to make the case against wind power - for example
in another report by Civitas, and also in
anti-wind media coverage.
National Grid says it can't comment on Gibson's work
directly. But it
suggests that by 2020 it will cost
somewhere between £851 million and £1.2 billion a year to manage
the variability of wind - less than half of Gibson's estimate.
Electricity Network Strategy Group, of
which National Grid is a part, has also predicted that it will cost
£8.8 billion to upgrade the grid over the next few years. But
that's the total cost between now and 2020 - not the cost per
So if we assume that upgrading the grid will cost the
same every year (it
won't), then that's an annual cost of
around £2 billion by 2020. Still a pretty big figure, but not as
big as REF suggests.
Other commentators have been critical of Gibson's
work. Energy blogger, Chris Goodall, took issue
with his calculations in January 2012. He wrote:
"...many, many other analysts and
engineers have also estimated the extra costs of adding large
volumes of wind power to the electricity system. In this note I
suggest that these alternative sources support a view that Mr
Gibson's estimates are wrong by about a factor of four".