Government plan to shuffle green policy costs could hurt consumers in the long run
The government is looking at ways it can cut household energy bills as energy companies continue to hike prices.
One option is to move the cost of some government policies off energy bills and onto tax bills. The plan would allow the government to show it cares about the politically salient ‘cost of living crisis’ through a potentially headline-making energy policy.
The plan could cut energy bills in the short term, and could help lower income households. But if it means rolling back energy efficiency measures which cut costs in the long run, it isn’t guaranteed to save people money.
Shuffling costs
The Daily Mail reports that chancellor will announce that the costs of a set of energy efficiency policies will be taken off household bills and added to tax in the Autumn statement – effectively a mini budget – in December.
The switch could potentially mean energy bills fall by £75, the Daily Mail reports. The Department of Energy and Climate Change currently estimates that its policies – often described as green levies – add £112 to the average annual energy bill. The Mail reports that the plans could remove all but the £30 levy that goes towards supporting renewable energy from people’s energy bills.
Helping low income households
The government’s (unconfirmed) plan doesn’t mean people won’t pay for the policies, it just means they’ll be paid for in a different way. The chancellor’s plan would add a bit to people’s tax bill to pay for energy efficiency policies such as the energy companies obligation (ECO) and warm home discount instead of it being added to bills.
However, the change could benefit low income households. As of April, the government changed the way energy efficiency policies were funded – ending all funding through taxation and loading the cost of the policies on to people’s bills.
The Joseph Rowntree Foundation (JRF), a thinktank concerned with identifying the causes of poverty in the UK, says putting levies on energy bills instead of taxation hits low income households hardest, and is therefore “regressive”.
JRF research shows that low income households spend a greater proportion of their income on energy bills. While some energy efficiency measures are targeted to help the worst off, only about 50 per cent ECO’s budget goes towards helping low income households, industry group the Association for the Conservation of Energy tells us. This means lower income households are paying proportionally more for policies they aren’t guaranteed to benefit from.
Reverting to paying for energy efficiency measures through taxation could mean some costs are rebalanced in a way which benefits lower income households.
Hurting energy efficiency
Of course, raising taxes is not popular, either. The energy efficiency industry is concerned the plan could mean reduced funding for energy efficiency, and a scaling back of programs which reduce energy costs in the long run.
As the chancellor wants to keep tax increases to a minimum, the Association for the Conservation of Energy’s head of research, Pedro Guertler, says it could mean energy efficiency policies receive less funding than they do under the current system.
The government estimates that energy efficiency policies and the warm home discount could save an average household £51 on their energy bill in 2020. If there’s less funding to implement energy saving measures such as insulation or more efficient boilers, such potential savings may shrink.
Guertler says energy efficiency policies are the easiest section of household energy bills for the government to target, as it doesn’t have the same legal obligations to address energy saving as other policy areas like reducing carbon dioxide emissions or increasing renewable energy generation.
While shuffling the cost of energy efficiency policies from household bills to tax might be politically eye-catching and could help some households, it raises the prospect of a funding cut for energy saving schemes. If that were to happen, the government’s plan could spell an uncertain future for energy efficiency schemes.