Why the government adds green levies to household energy bills
The government expects household energy bills to increase significantly over the next 15 years. But its energy and climate policies will help curb the rise, it argues, making households better-off than they otherwise would be.
It’s become a familiar refrain from the Department of Energy and Climate Change (DECC).
The media has something of an obsession with whether the government’s efforts to decarbonise the UK’s energy sector add to people’s bills. Perhaps because of this, DECC appears to have stepped up its efforts to persuade us that its policies are beneficial to consumers.
Yesterday, it updated its estimates of how the government’s policies impact household energy bills. We take a look at what DECC expects to happen, and the assumptions behind its projections.
Bills in 2020
DECC expects an average household energy bill in 2020 will be £50 lower than today in real terms.
But its projections go further than this. DECC also says it expects households will pay £92 less in 2020 than they would if the government doesn’t implement any climate or energy policies, such as subsidising low carbon energy projects or installing smart meters.
This graph shows how much of an average household’s bill DECC expects to go towards paying for different parts of the energy system, now and in the future:
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Source: DECC, Estimated impact of climate and energy policies on energy prices and bills.
It might seem remarkable that the government thinks bills are going to reduce in the next five years. But DECC is less optimistic than it has been in the past – last year, it estimated bills would be £166 lower in 2020 as a consequence of its policies.
The savings estimate has been reduced for two main reasons. First, because DECC expects gas to be cheaper in 2020 than it previously projected. That means households using gas more efficiently are expected to save less money. Secondly, DECC says new evidence suggests the government’s energy efficiency policies won’t save as much as previously thought.
Bills in 2030
Sounds like good news. But post-2020 DECC expects bills to rise again. It estimates that an average household will pay £155 more for its energy in 2030 than it does today, in real terms.
Costs rise because households will be taking on the burden of paying to change or upgrade parts of the UK’s energy system. This graph shows what will added and taken off an average household energy bill in 2030, compared to 2014, as a consequence of the government’s policies:
Image - Screen Shot 2014-11-07 At 11.33.14 (note)
Source: DECC, Estimated impact of climate and energy policies on energy prices and bills. Graph by Carbon Brief.
Wholesale fuel costs will rise in the next 15 years, DECC projects. It expects gas prices to rise by about 23 per cent between 2020 and 2030, and coal prices to rise by about 10 per cent. That means an average household is expected to pay about £45 more towards the cost of energy companies buying fossil fuels in 2030 than it does today.
But the biggest additional cost in 2030 is the amount an average household is expected to pay towards the government’s low carbon policies. In 2030, an average household is expected to pay £141 more towards the cost of subsidising the UK’s nuclear power plants and renewables than it does in 2014.
But DECC still argues households will save in 2030, even though bills will be going up. It says bills will be £62 lower than what consumers would pay in a policy-free world.
Without policies to change the energy system, consumers would pay less as a result of not being given the bill for green measures. But they’d pay more for towards the wholesale cost of energy. That’s because renewables help cut the wholesale price of electricity, and the UK would be much more reliant on fossil fuels if the government doesn’t subsidise companies to build more renewables and new nuclear plants.
Assumptions
How persuasive you find DECC’s argument may depend on how much you trust its assumptions. In particular, there is a lot of uncertainty about estimates of how much energy will cost in the future.
Such estimates rely on two predictions: how much energy demand there will be, and what the cost of fuel is likely to be. If the government’s projections for either are these are wrong, it can have a big impact on its estimates of how much households will pay for energy.
DECC expects there to be a long term trend of UK households using less energy. It assumes household electricity demand will continue to fall – about 20 per cent by 2030, compared to 2005 levels, with gas demand falling by about 25 per cent. Without government policies, demand is still expected to fall, but not by as much: electricity by about eight per cent, and gas by about 17 per cent.
At the same time, DECC assumes the cost of gas and coal, the main fossil fuel used to generate electricity, will rise significantly. But such prices aren’t stable.
That’s why DECC updates its price estimates each year. DECC’s most recent estimates project gas being about 20 per cent cheaper in 2020 than it’s previous projection. It also expects gas to be slightly cheaper in 2030 than it previously thought.
The wholesale cost of energy is the main part of a household’s bill. So if DECC is wrong about how much energy will be used in the future, or how much fossil fuels will cost, its household bill estimates could be way off.
Uncertainty
Rising bills are a key concern for consumers and politicians. But viewing energy policy through this narrow lens can obscure the wider rationale for some climate and energy policies.
For instance, there are costs associated with emitting more greenhouse gases as a consequence of failing to decarbonise the energy sector. Switching to lower-carbon power sources can also bring co-benefits such as cleaner air, community payments, and the creation of green jobs (although the evidence is complicated).
Of course, exploring for fossil fuels such as shale gas could provide some of these benefits, too. That’s part of what makes predicting the future of energy policy and bills very complicated. And it’s why it’s hard to say with any confidence what the impact of the government’s policies may be in the future.