The government has repeatedly cited official forecasts of rising energy costs to justify cuts to subsidies for renewables, saying consumer bills need to be kept under control.
But calculations behind the forecasts – until now undisclosed – show it expected domestic energy bills to be nearly £100 lower in 2020 than previously thought, despite higher subsidies.
The revelation comes in emails exchanged last May between senior civil servants at the Department of Energy and Climate Change (DECC) and the Treasury. The redacted emails – classified as “sensitive” – have been released by DECC to Carbon Brief following a long-running Freedom of Information (FOI) request.
The updated estimates – made in early 2015, but not previously released – found an average household energy bill would be £1,222 in 2020, some 7% (£97) lower than the £1,319 projection made the previous year.
The reduction is largely down to falling fossil fuel prices. With fossil fuels responsible for about half of the UK’s power generation in 2015, DECC now expects wholesale electricity to cost less than 5p per unit in 2020, around 10% lower than it was projecting a year earlier.
Yet ministers have repeatedly cited the official forecasts when explaining their changes to green energy policy. For example, Amber Rudd, energy and climate change secretary, told parliament in September:
I was shocked to find the scale of the [renewable energy subsidy] overspend and have therefore responded in order to keep consumer bills under control.
This support was supposed to reach a maximum of £7.6bn during 2020/21, funded via energy bills. However, the Office for Budget Responsibility found LCF spending could reach £9.1bn that year.
However, using the new information revealed in the emails, Carbon Brief has calculated that around £0.5bn of the £1.5bn is purely down to reductions in forecast wholesale electricity costs.
This is because some low-carbon subsidies top up the wholesale price of power to a fixed level. If prices fall, the subsidy increases. If prices rise, the cost of support is reduced.
The new electricity price projections mean household bills are expected to be lower overall, despite a small increase in expected subsidy costs.
Some £92 of an average £1,319 household energy bill in 2020 would come from LCF spending, if the £7.6bn cap were adhered to.
In the updated figures released to Carbon Brief, which include an LCF overspend and reduced wholesale prices, the subsidy rises to £104 per household, yet the total average bill falls to £1,222.
So, in contrast to the government’s narrative of fighting rising bills, the new figures actually forecast lower-than-expected energy bills for 2020 with any rise in LCF costs being outweighed by the fall in wholesale costs.
However, despite the information revealed in the DECC emails, there are still many unanswered questions around forecast LCF spending.
For instance, while DECC has published (reduced) estimates for future renewable energy deployment in total, it has not set out its expectations for deployment under each of different schemes that make up the LCF.
Other unanswered questions include:
- What is the full methodology behind the forecasts of LCF spending, and what assumptions are being made?
- Why is DECC’s May forecast for LCF spending in 2020/21, at just over £8.6bn, some £0.5bn lower than the OBR’s equivalent figure?
- Why did the OBR, rather than DECC, produce the LCF estimates cited by the chancellor in his summer budget?
- Did DECC supply figures to the OBR to inform its forecasts?
- Why are both figures produced in July so much higher than the within-budget LCF forecasts, which DECC produced just six months earlier, albeit under a coalition government?
DECC has partially answered one of these answers in its response, which we publish in full, below. We will update this article if we receive further clarification.
Despite these uncertainties, Carbon Brief has been able to estimate the impact on LCF spending of changes in wholesale electricity price projections.
Between 2013 and 2015, DECC cut its forecast for the 2020 wholesale price from 6.3 to 4.9p per kilowatt hour of electricity. This translates into a £14 per megawatt hour increase in the cost of subsidies under the contracts for difference scheme.
DECC has sent Carbon Brief the following response, which we publish in full:
“We don’t believe that a reduction in forecast energy bills overall due to lower wholesale prices means that it is right to therefore pay higher subsidies and break the LCF cap, especially at a time when costs of technologies like offshore wind are falling.
“The Secretary of State did not make inaccurate claims about the reasons for needing to reduce subsidies to low carbon generation. The amount of renewable energy which is affordable under the LCF cap will still happen and will achieve our ambitions, but we are not going to continue to allow the levels of previous deployment because there is not the budget for those levels and we don’t want consumer bills to rise any more.
“Getting consumers bills as low as possible is key – this is not meant to provide government with flexibility to then spend more consumer bill-payers money on subsidies. We aren’t going to apologise for ensuring consumers [sic] hard earned money is put to best use.
“As the Secretary of State has stated previously: ‘My priority is to ensure energy bills for hardworking families and businesses are kept as low as possible whilst ensuring there is a sensible level of support for low carbon technologies that represent value for money. We have to get the balance right and I am clear that subsidies should be temporary, not part of a permanent business model. When the cost of technologies come down, so should the consumer-funded support.’
“The Treasury uses OBR forecasts in all its decision making, so there is nothing strange in HMT using the projections of the independent OBR. You should note that the OBR was set up for precisely this type of issue.”
Responding to the FOI release to Carbon Brief, Sir Ed Davey, Amber Rudd’s predecessor as secretary of state at DECC, says:
“How the alleged overspend on the LCF was calculated unfortunately remains a mystery. The scandalous lack of openness and transparency on that crucial calculation means the Conservatives are decimating a whole industry, with no convincing hard evidence to justify their decisions.
“These emails do at least confirm what I’ve argued all along…I told [George] Osborne we needed an LCF where investment spend was robust to short term fluctuations in wholesale fossil fuel prices. He wouldn’t accept our plans to design out the problem, but agreed instead to a 20% contingency above the levy control ceiling, if wholesale prices turned out lower than expected.
“Now that they have, and because Lib Dems aren’t there to keep them honest, the Conservatives are failing to use that contingency. This is Alice in Wonderland economics, which is butchering the UK’s successful renewables industry.”
Lisa Nandy, Labour’s shadow secretary of state for energy and climate change, says:
“If the Chancellor’s cuts to clean energy schemes were really about protecting billpayers the government would not now be handing out generous new subsidy contracts to diesel generators that will increase energy bills. Nor would they be ruling out support for one of the cheapest energy options we have, onshore wind farms, all whilst pushing ahead with more expensive projects. Cutting spending on home insulation schemes that could reduce family bills by hundreds of pounds a year are not the actions of those motivated by reducing costs either.”
Dr Gordon Edge, Renewable UK director of policy, says:
“We have repeatedly called on government to explain its methodology behind the projected [LCF] overspend as the industry takes costs very seriously. It is vitally important that the policy debate in and outside of government is not swept up in a collective groupthink that we have massively overspent the budget. This is far from proved. We can’t have a reasoned debate unless government shows its workings and interested observers can work out if the numbers are correct.”
The Solar Trade Association (STA) has made its own, unsuccessful FOI request on the LCF projections. It says the government ” has yet to fully explain the sudden increase in projected 2020 spend” and calls for the cap to vary in line with changing wholesale prices.
Responding to Carbon Brief’s article, the STA says wind and solar power reduce wholesale prices, as the electricity they produce comes at zero marginal cost. This, combined with the chancellor’s decision to freeze the UK’s carbon floor price, has contributed to lower-than-expected wholesale electricity prices.
Last July, Carbon Brief submitted the same FOI request to both DECC and the Treasury, asking:
Please can you send me any materials relating to the Levy Control Framework, particularly communications/documents related to any forecasts, sent by DECC officials to The Treasury since 1 January 2015? Equally, any related materials sent to DECC from The Treasury.
This request was rejected by both departments as “manifestly unreasonable”, but they offered to reconsider if the request could be narrowed. So in August, Carbon Brief submitted this request to both departments:
In an attempt to significantly reduce the scope of my request, please could you restrict your search over the same time period to communications/documents about Levy Control Framework forecasts received by/sent to the Treasury from the following officials at the Department of Energy and Climate Change (DECC): Steph Hurst (Markets and Infrastructure); John Hiennes (Markets and Infrastructure); Jeremy Pocklington (Markets and Infrastructure); Steven Fries (Analysis, Corporate Services); Neil Bush (Analysis, Corporate Services); Paul Bailey (Analysis, Corporate Services).
In September, the Treasury responded by saying that the “balance of public interest favours withholding this information”. DECC also sent a similar response.
Carbon Brief appealed both decisions, as is the requester’s right under FOI law, sending the following explanation:
I would like to appeal your decision, on the grounds that the forecasts showing an apparent overspend of the Levy Control Framework are being used by the current government to justify a series of major policy changes/cancellations. Given the multi-billion-pound implications of the resulting policy changes, it is of clear public interest for the public to have a better understanding of the methodology, data sources and assumptions underpinning these pivotal forecasts. The release of such information should not restrict the ability and space to form policy.
In December, Carbon Brief asked both departments how the appeals were progressing. DECC finally sent its response this week and the Treasury sent an almost identical response a day later.
This is an extract of DECC’s response:
We now consider that the public interest balances favour of disclosing the information you have requested. I can confirm that the Department of Energy and Climate Change holds the following information in scope of your request which is enclosed with this reply: 1) Email from Jeremy Pocklington to HM Treasury dated 6 May; 2) Email from Paul Bailey to HM Treasury dated 27 May (including an attachment titled “LCF Bill Impacts in 2020 – April 2015”).
We are continuing to withhold information from a draft DECC paper under regulation 12(4)(d). Whilst we recognise the public interest in transparency and improving public understanding of how the Levy Control Framework forecasts were arrived at, we consider that there is a public interest in protecting the ‘safe space’ of the decision making process and that disclosing this material would harm that safe space. We consider that disclosure of information from a draft paper would impact on DECC’s willingness to share information with the Treasury and would impact on DECC’s ability to conclude their consideration of the subject of the paper.
Carbon Brief is currently considering its response.
Update 5 January 15:00 – The Treasury has responded to our FOI appeal, with near-identical wording to the DECC response.
Main image: Solar Photovoltaic (PV) Panels cover the roof of Palestra House, the home of the London Climate Change Agency and the London Development Agency. © Andrew Aitchison/In Pictures/Corbis.
Revealed: Emails undermine government's argument for cutting support for renewables
An FOI request reveals the UK government cut subsidies for renewables despite forecasting household energy bills would be lower than expected in 2020