Consumers dont believe the government can keep decarbonisation costs under control
Energy secretary, Ed Davey, says keeping household energy bills down is at the top of his department’s priority list. But only 18 per cent of consumers think the government can keep the costs of its low carbon energy policies under control, according to a new report by consumer group, Which?
The government is looking to attract around £75 million of low carbon energy investment, but Which? says the way the policies currently stand gives consumers a raw deal. It calls on the government to scrap the carbon floor price, reassess the capacity mechanism, and do more to convince consumers that a low carbon energy sector is worth paying for.
Scrap the carbon price floor
The consumer group says the government should scrap the carbon price floor (CPF), a new tax intended to incentivise low carbon energy investment. The cost gets passed on to the consumer, and Which? says the CPF won’t help the government meet its decarbonisation goals.
Generators already pay to emit carbon dioxide under the European Union emissions trading scheme (ETS). But the ETS price has slumped in recent months – to around â?¬4 per tonne of carbon dioxide – lessening the incentive to move away from high-emitting fossil fuel electricity generation. To counter this, the UK government devised the CPF as a top-up tax that generators must pay on top of the European carbon price.
The tax came into effect in April, forcing high-emitting electricity generators to pay more to burn fossil fuels. The ‘floor’ is currently set at £16 per tonne, meaning generators have to pay the Treasury an additional £12.50 (as well as â?¬4 to the EU) for every tonne of carbon dioxide they emit. As the graphic below shows, this cost will increase over time – the government expects the CPF to be around £30 in 2020, and £70 in 2030:
The generators eventually pass the extra cost onto consumer bills. Which? estimates the CPF will add between £29 and £68 to an average electricity bill in 2015/16.
The government justifies the bill increase on the basis that it will help decarbonise the energy sector and save consumers in the long run. It says setting the price two years in advance means investors can plan ahead, see that burning fossil fuels is going to be costly, and invest in low carbon generation instead.
But Which? says two years isn’t long enough, as most major investment decisions take longer, so investors won’t necessarily be able to make that calculation.
It also points out that the CPF is an annually reviewed tax, so could be scrapped or changed at any point. In which case, it won’t provide the stable investment environment the government claims is key to attracting low carbon energy investment.
So as far as Which? is concerned, the CPF won’t help incentivise low carbon investment – meaning consumers will effectively be paying just to boost the Treasury’s coffers – and so should be scrapped.
Capacity market – wrong policy, wrong time
Which? also asks the government to revisit the measure intended to prevent power shortages: the capacity market. It says the policy clashes with other government plans, and could mean consumers end up paying more for low carbon electricity generation.
While there is a surplus electricity available to the grid at the moment, that is expected to change. As more renewables come online, fossil fuel plants won’t need to generate as often – reducing their profit margins and causing some plants to close. This is a problem, as some fossil fuel plants – mainly gas – will be needed to back up windfarms and solar plants that don’t produce electricity when the wind isn’t blowing or the sun is hiding behind a cloud.
The government’s preferred solution is to pay some fossil fuel plants to be available when they’re needed.
Generators will soon be able to bid on this ‘capacity market’ to stay open. The government will then decide how much capacity it needs to keep in reserve, and choose the cheapest options. It’s hoped this mechanism will keep wholesale electricity prices down, since generators won’t be able to charge as much when demand is high and supply is tight, as they know the government has other options in reserve.
So far, so good. But Which? says there is a “problematic link” between the capacity market and one of the government’s other decarbonisation policies – contracts for difference (CFDs). This could mean consumers end up paying more for low carbon electricity, even while wholesale prices fall.
Under CFDs, the government is set to pay low carbon generators – including nuclear – a guaranteed price for the electricity they produce, known as a strike price. If the wholesale price is less than the strike price, the government pays the difference with the cost passed on to consumers. If the wholesale price is higher than the strike price, generators pay the difference back – with the saving passed on to consumers.
The problem is that the capacity market is likely to keep wholesale prices low, so the gap between the strike price and wholesale price is always likely to favour generators. This decreases the chance of generators ever having to pay back consumers. It also means – counterintuitively – that consumers pay more for low carbon electricity despite lower wholesale prices.
The capacity market plans are also badly timed, Which? says. It is set to be implemented in 2014, just when energy regulator Ofgem says the risk of blackouts will decrease again. So consumers could be paying for backup capacity they no longer need.
Which? says the government should “proceed with caution” as it sets about implementing the capacity market.
Consumer confidence
What’s more, Which? says the government “has not done enough to win consumer support for cutting emissions from energy”.
Designing policy to incentivise low carbon generation while keeping consumer costs low is not easy. And most people aren’t convinced the government is managing, according to Which?.
In part it’s because even the most dedicated energy policy fans find it hard to get their heads around government reforms. Which? says 55 per cent of consumers are confused by the messages they hear about moving to low-carbon energy.
Of course, this might not be all the government’s fault. Media coverage of how much ‘green’ policies add to household energy bills is polarised, to say the least. Nonetheless, Which? says “more needs to be done by government to reassure consumers costs will be manageable”.
Work to do
As the energy bill moves into the final parliamentary stages, the government still has plenty of work to do. It needs to iron out how its policies affect each other, and ensure they don’t adversely affect consumers.
The report shows when the government’s policy reforms do pass, it still needs to convince the public that a decarbonised energy sector is worth paying for.