These days, it’s a far less frequent occurrence – probably because household energy bills have been falling. But energy costs returned to the news this past week as opposing sides limber up for a coming fight over the UK’s top-up carbon tax, the carbon price floor (CPF).
Carbon price floor
The CPF stands at £18 per tonne of CO2 and is frozen at that level until 2020. Former chancellor George Osborne had promised to set the future trajectory of the tax in his Autumn Statement.
The doubling of the floor from £9 to £18/tCO2 in April 2015 has been a major factor in driving coal out of the UK electricity mix. Coal output is down two-thirds in 2016 so far, compared to the same period last year.
Most obvious cause of UK coal power crash is UK carbon price, which doubled in April 2015: pic.twitter.com/5LAHmBbfZc
— Simon Evans (@DrSimEvans) August 19, 2016
Along with a fall in wholesale gas prices and rising renewable capacity, the CPF has seen coal move off the system far quicker than expected last year, when the government announced its intention to phase out unabated coal by 2025. The new government has reiterated this intention.
Large energy firms including SSE and Drax want the CPF to be maintained, reports the Financial Times. The policy is “central to the UK’s efforts to decarbonise its electricity system”, the firms say.
Explaining their views, Pavel Miller, SSE head of wholesale policy writes:
Earlier this year, SSE asked KPMG to look into the costs and benefits of the price floor. According to Martin Pibworth, SSE managing director for wholesale, KPMG found the policy to benefit UK security of supply, whereas removing it would put at risk some 2 gigawatts (GW) of gas capacity.
(The KPMG report doesn’t seem to be in the public domain. We have asked SSE for a copy).
There is relatively wide support for the price floor among those in the energy industry. Speaking to Carbon Brief earlier this year, Lawrence Slade, chief executive of industry group Energy UK, said the government should set a “clear and stable trajectory” for the CPF beyond 2020.
Others would like it scrapped. The Engineering Employers Federation (EEF), a manufacturers’ group, says the tax should be ended as soon as possible, the Financial Times reports. EEF has long lobbied against the CPF. Note that heavy industry is largely exempted from the costs it imposes.
The price floor is also opposed by a number of right-wing thinktanks, including the Centre for Policy Studies, Civitas and the TaxPayers’ Alliance. Apart from being neighbours, these groups have all used similar arguments against the carbon price floor.
The combined cost of subsidies for renewables and the CPF will amount to some £550 per household in 2020, the Centre for Policy Studies says in a short bulletin released this week. Along with chemical firm Ineos (another long-time critic of the CPF), the centre is calling for the price floor to be scrapped, reports the Telegraph.
The £550 per household figure is similar to one claimed by Civitas in 2013. Both are multiples of official estimates, which suggest that low-carbon subsidies and carbon taxes will add around £100-129 to bills in 2020. (The higher figure includes the cost of ensuring the lights stay on). Update 30/9 – see note below.
In a statement sent to journalists, the Department for Business, Energy and Industrial Strategy (BEIS) says:
The government estimate of policy costs is somewhat out of date, having been published in 2014. A BEIS spokesperson tells Carbon Brief: “We don’t have an update on whether there’ll be another prices and bills report”.
The BEIS statement highlights the main reason why the Centre for Policy Studies figure is so high, but there are other reasons. In particular, it assumes that renewables will impose “network and other costs” amounting to £5bn in 2020, covering grid strengthening and the need for backup.
This part of the Centre for Policy Studies’ calculation is based on figures from the Renewable Energy Foundation (REF), the anti-renewables outfit that has ties to the climate-sceptic Global Warming Policy Foundation.
In a report for the GWPF, REF says wind energy imposes costs of system costs £60-67 per megawatt hour (MWh) of electricity generated. The Centre for Policy Studies has multiplied the higher £67 by a government estimate of wind output in 2020 (78,270MWh) to get its £5bn total.
The government’s advisory Committee on Climate Change (CCC) gives a much lower estimate for system costs of £10/MWh, and this only in 2030 if 35-40% of UK power is from wind and solar. Even at this level, system costs would amount to no more than £780m in 2020.
Taken together, a back-of-the-envelope estimate of the additional costs of policy including the carbon price floor, support for low-carbon electricity under the Levy Control Framework and system costs amounts to perhaps £10.6bn in 2020.
Assuming they are responsible for one-third of this total, each household would pay £131 in 2020, rather than the £550 claimed by the Centre for Policy Studies. This lower estimate is close to official estimates, even though it additionally includes system costs as well as policy costs.
Citing its £550 policy cost per household, the Centre for Policy Studies bulletin also calls for a broader rethink on UK energy policy. It says the emphasis should be on reducing costs and maintaining security of supply.
Though it does not say so directly, the unspoken implication appears to be that the emphasis on reducing CO2 emissions should be reduced. The bulletin says:
Carbon Brief spoke to Tony Lodge, political and energy analyst at the Centre for Policy Studies and one of the authors of its bulletin. Asked about the UK’s Climate Change Act, Lodge says: “I’m not saying to tear it up”.
However, he does say there is a case to review and possibly relax the UK’s legally-binding carbon budgets for the 2020s. The fifth carbon budget, a 57% cut on 1990 levels by 2030, was fixed in June after being recommended by the CCC last year.
Lodge says targets might need to be relaxed so as to accommodate more gas-fired power stations, which he says we need to keep the lights on. Experts question the scale of new gas needed in the 2020s, arguing it may be lower than expected.
The CCC cautions against over-reliance on gas, and says that wind and solar will be cheaper than gas in the 2020s. It says: “Extensive use of unabated gas-fired capacity…in 2030 and beyond would be incompatible with meeting legislated carbon budgets.”
It argues that the most cost-effective route to the UK’s longer-term 2050 CO2 target (which Lodge says he does not oppose) involves largely decarbonising the power sector by 2030.
Update 30/9 – The DECC/CCC estimates of bill impacts (£100/129) specifically exclude the cost of energy efficiency, fuel poverty, smart meter and capacity market policies. This is because the Centre for Policy Studies figure also excludes these costs. Including these additional policies, the cost added to bills in 2020 would amount to £189 or £160, according to DECC and the CCC respectively.
Note, again, that these figures were published in 2014 and so do not reflect policy changes since then, including efforts to reduce subsidies for renewables. Nor do they reflect a range of factors that will have increased policy costs, including lower expectations for future wholesale prices, the faster-than-expected uptake of subsidies under the Renewables Obligation and Feed-in Tariffs plus higher-than-expected output from offshore windfarms.
On the other hand, the estimates also exclude savings on bills due to energy efficiency policies, as well as the impact of renewables in reducing wholesale power prices.
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