Household energy bills are rising, and some have been quick to blame ‘green’ levies for the rising costs. But the government disagrees. It says supporting low carbon energy generation will reduce electricity bills on average by Â£41 by 2030.
The government recently announced plans to cut Â£50 from the average energy bill by shuffling the way energy efficiency schemes are funded – moving payments onto general taxation. Some levies still remain, however. People still pay to subsidise low carbon energy generation through their bills.
This doesn’t necessarily mean electricity will be cheaper than today, however. The government compares the cost of its policies to a ‘counterfactual’ – a world where different policies achieve the same aim of decarbonising the UK’s energy system.
The Department of Energy and Climate Change (DECC) published its electricity market reform delivery plan this morning, outlining how it expects policies contained within the recently passed energy bill to affect household electricity costs.
While the cost of supporting some low carbon energy generation will rise, it says the policies should help bring overall electricity prices down – with those savings passed on to the consumer, as this graph shows:
It expects the cost of supporting low carbon energy in 2020 to be spread across policies like this:
*Note: Amounts may not add up due to rounding
But it expects these additional costs to largely be offset by the effect the policies have on the wholesale price of electricity.
If the UK builds more low carbon energy – which the three policies above are designed to incentivise – then the whole system has lower fuel costs. This helps to drive down the wholesale price of electricity, as has happened in Germany. DECC assumes suppliers pass that saving on to consumers.
DECC says the wholesale cost should also be kept down by the introduction of a capacity market – in which suppliers bid to provide electricity in the future, to prevent power levels running low. That policy should mean the grid will always have an abundance of electricity. As electricity is more expensive when it’s in short supply, DECC argues that the capacity market helps reduce cost.
Once the policies’ effect on the wholesale price and energy system more generally is factored in, DECC says its low carbon support policies should reduce costs on average by Â£41 by 2030.
DECC’s calculations are based on the assumption that the alternative to its reforms is more expensive.
For example, it claims the new way of subsidising low carbon generation – contracts for difference – is cheaper than the old system.
That’s mainly because a guaranteed price for low carbon electricity – known as the strike price – is agreed much earlier in the development process, meaning investors can be more sure to see a return on their investment. DECC argues that less uncertainty means it should be cheaper to borrow money to build low carbon plants, and that savings can be passed on to the consumer.
The government has just signed a deal with energy company EDF to build a new nuclear plant at Hinkley Point in Somerset. It remains to be seen whether or not contracts for difference will help EDF build that plant on time and on budget, however.
DECC also assumes its reforms means the UK’s carbon price – designed to top up the European emissions trading scheme price – doesn’t need to be as high to incentivise the same amount of low carbon generation. It expects that saving to be passed on to the consumer, too.
How the carbon price could realistically rise by enough to incentivise low carbon investment is unclear, however. The European carbon price is consistently around â?¬5, and the government has already outlined how much it expects the UK’s carbon price to increase until 2020.
So DECC’s policies could mean electricity is Â£41 cheaper in 2030 than it otherwise would be – but only if you accept DECC’s argument that the alternative is more costly.