Will households really pay £600 for green energy?
It feels a bit like it’s 2011 again. Exchanging different predictions for how much moving to a greener energy system might be going to cost British consumers was all the rage about eighteen months ago. Today, reports in the right wing press claim Britain’s green energy “folly” will cost consumers £600 a year by 2020.
The Mail and Telegraph picked up on a press statement from thinktank Civitas arguing that green energy subsidies will cost every household £600 per annum – or £16 billion in total – by 2020. The figure is based on calculation by the chief executive of the Renewable Energy Foundation (REF), Dr John Constable.
How has the figure been created, and how does it compare to DECC’s?
REF has calculated the figure of £16 billion by adding up the following cost estimates for 2020:
- cost of subsidising renewables through the the government’s main mechanism the Renewables Obligation (RO) – £8 billion or £307 per household;
- cost of upgrading and maintaining the power network, and managing the variable supply of power from wind – £5 billion, or £192 per household;
- cost of the Carbon Price Floor – £1 billion, or £38 per household.
This makes £14 billion. REF adds VAT to get to just over £16 billion.
The Department of Energy and Climate Change (DECC) has issued a statement saying it doesn’t recognise REF’s number. Altogether it suggests that the RO will add £63 to household energy bills by 2020. Add on the costs associated with developing green technologies – including a few with REF don’t account for – and it suggests subsidies will add about £200 to consumer energy bills by 2020.
The difference in the figures lies in the assumptions DECC and REF have made to calculate the cost of renewables.
Passing on costs from business and industry
The government funds green energy subsidies by allowing energy companies to add them to consumer energy bills. But they’re also added to the energy costs paid by businesses and industry.
Some commentators argue that businesses will then pass on those costs to consumers by charging more for their products and services – so the government should take that into account when calculating the costs households have to bear. In its calculation, REF assumes thatall of the costs borne by business and industry will be passed on to consumers. This accounts for two thirds of its projected cost, or £400 per household.
But academics have challenged this view. Last year, Dr Rob Gross of Imperial College London labelled this approach “misleading in the extreme“. He argued that the potential for competition between businesses, changes to other prices, and other changes to the economic cycle mean
“it is by no means obvious that a tiny fractional overall cost increase will pass [from business to consumers] – 100 per cent, 80 per cent, or at all”.
Other thinktanks that have used the same approach have estimated lower pass through costs. In August 2011, the Taxpayers Alliance estimated that businesses will pass on 80 per cent of the costs to consumers. In June 2012, conservative thinktank Policy Exchange suggested that about 70 per cent of the costs will be passed on to consumers.
The cost of upgrading the grid
REF’s calculation also adds on £5 billion a year for the “additional system cost” of wind power – that is the cost of adding additional power lines to connect up wind farms, and managing the grid so that it can cope with the variable supply from wind.
The prediction is based on work by Colin Gibson, who REF says used to be Power Network Director for National Grid. Gibson’s work has been used before to make the case against wind power – for example in another report by Civitas, and also in anti-wind media coverage.
National Grid says it can’t comment on Gibson’s work directly. But it suggests that by 2020 it will cost somewhere between £851 million and £1.2 billion a year to manage the variability of wind – less than half of Gibson’s estimate.
The Electricity Network Strategy Group, of which National Grid is a part, has also predicted that it will cost £8.8 billion to upgrade the grid over the next few years. But that’s the total cost between now and 2020 – not the cost per year.
So if we assume that upgrading the grid will cost the same every year (it won’t), then that’s an annual cost of around £2 billion by 2020. Still a pretty big figure, but not as big as REF suggests.
Other commentators have been critical of Gibson’s work. Energy blogger, Chris Goodall, took issue with his calculations in January 2012. He wrote:
“…many, many other analysts and engineers have also estimated the extra costs of adding large volumes of wind power to the electricity system. In this note I suggest that these alternative sources support a view that Mr Gibson’s estimates are wrong by about a factor of four”.