10 Energy consumers|
239. The Government has stated that affordability
is one of the three overarching aims of the EMR proposals. Compared
with a "business as usual" baseline, the Government
estimates that the three packages assessed in the Consultation
Document would result in an increase in bills between 2011 and
2025 and then relatively lower bills between 2026 and 2030.
It should be noted that electricity bills are expected to increase
anyway under the baseline scenario (partly as a result of rising
fossil fuels prices and the need to replace aging infrastructure),
so in all cases, electricity bills will be higher in 2030 than
they are today. Table C14 in DECC's Impact Assessment (reproduced
below) describes the expected impact of the four different packages.
Table 1: Impact of EMR packages on bills for both
industrial and domestic customers
|Baseline average (Package 1)
||Package 2 (Premium FIT)
||Package 3 (CfD)
||Package 4 (Fixed FIT)
Source: DECC, Electricity Market
Reform - options for ensuring electricity security of supply and
promoting investment in low-carbon generation, Impact Assessment,
December 2010, p.92
240. Evidence to us suggested that maximising the
up-take of energy efficiency measures will be the key to ensuring
the reforms are affordable. The Government has created its proposed
Green Deal programme with the aim of improving energy efficiency,
which in turn is intended to minimise the impact of rising electricity
prices on bills (assumptions about the Green Deal were factored
into Redpoint Energy's analysis for DECC). However, we encountered
some scepticism about the likely effectiveness of the Green Deal.
This arose from a belief that the interest payments on Green Deal
loans are likely to be offputting to potential participants.
Peter Atherton (Citigroup) considered that:
The Green Deal will perhaps offset [increasing
electricity prices] a touch, but don't forget that people have
to pay for the loans. The Green Deal is not a grant; it's a loan.
You are paying for the loan. Your overall energy bill may fall,
but when you add the loan price back in, the cost doesn't actually
fall for the consumer.
Alan Simpson (Friends of the Earth) agreed with this
analysis and suggested that the Green Deal was unlikely to help
beat fuel poverty. He told us: "it's hard to see the fuel-poor
wanting to take on personal debt at a time when we are encouraging
them to reduce national debt".
241. We found a general consensus among witnesses
that consumers are not aware that their electricity bills are
likely to increase over the next decade. Audrey Gallagher (Consumer
Focus) told us:
I do not think [consumers realise how much their
bill is going to go up in the next decade]. To me, there does
not appear to have been a huge amount of engagement on it, and
it is not something that is immediately apparent. [
] I would
suggest that generally consumers are not tremendously engaged
in energy. [
] It is not something that people give a tremendous
amount of thought to, so I do think we have to think about how
we can engage consumers more on this and educate them more.
242. It will be difficult to encourage action on
energy efficiency while consumers remain unengaged about the way
they use energy and the size of their bills. Audrey Gallagher
of Consumer Focus thought that basing a communications strategy
around "trigger points" such as moving house, getting
an extension or having a smart meter installed might help to make
it more effective.
243. Rising electricity prices are likely to increase
the number of people living in fuel poverty. Richard Hall (Consumer
Focus) told us:
The modelling appended to the impact assessment
suggests that fuel poverty figures will rise, certainly from where
they currently are. I think all the scenarios modelled are predicated
against the baseline that forecasts that electricity wholesale
costs will approximately double in real terms by 2030. It seems
unrealistic to expect that disposable incomes will increase by
a similar fraction, so one would certainly forecast a deterioration
in fuel poverty.
The Government's own analysis of the distributional
impacts of the EMR package shows that those on the lowest incomes
and single pensioners are likely to be hardest hit by the reforms.
Witnesses from Consumer Focus were particularly critical of carbon
price support in this regard, suggesting that it is a regressive
way to raise tax, which will hit low-income, single pensioners
(since the tax will be passed on to energy bills).
They suggested that hypothecating the revenue from the CPS towards
measures that would help reduce domestic energy bills among vulnerable
consumers (such as extending the Warm Homes discount, giving a
rebate on bills or investing in energy efficiency measures) could
be one way to mitigate its regressive impacts.
244. The potential negative impacts of the Electricity
Market Reform on fuel poverty and on those on low incomes must
be acknowledged. However, tackling fuel poverty cannot be the
driver of energy policy and therefore should not be the preserve
of DECC alone. Departments across Whitehall should work together,
particularly including the Department of Work and Pensions and
the Department for Communities and Local Government.
245. Table 1, above, shows that electricity bills
will also increase for business consumers. This may have a knock-on
impact on competitiveness and, ultimately, on jobs. Rhian Kelly
(CBI) told us:
I think for some, particularly if you are competing
in the UK market and it is only a small proportion of your costs,
then the direct impact from the EMR package for competitiveness
should be manageable. We are concerned because there are certain
sectors where competitiveness will be a challenge, particularly
if the costs rise to more than their competitors' internationally.
246. The main causes for concern are high electricity
users that are exposed to international competition, such as the
aluminium and chemicals sectors. The CPS was felt to be the most
problematic aspect of the package and we heard concerns that it
may lead to competitiveness problems and "offshoring"
of carbon emissions.
247. If the EMR is successful in delivering increased
levels of low-carbon electricity generation, there could also
be some economic benefits for low-carbon industries such as manufacturing
and operating renewables and delivering energy efficiency services.
The environmental NGOs and companies working in the low-carbon
sector were keen to highlight this fact.
The CBI agreed that the EMR could provide significant economic
benefits to the UK. Rhian Kelly told us:
At the CBI, we have always tried to talk up the
opportunities for businesses based in the UK over the next 20
years, and think that it could be a massive opportunity for UK
manufacturing if we can get the package of EMR right. I think
getting it right will allow us to understand better where we can
grow UK opportunity and UK manufacturing and supply chains, but
also understand better where it might be that we need to buy in
some of the technology. The ideal solution would be that the
UK is able to take advantage of existing strengths and build those
into the need to renew our ageing infrastructure in the next 20
248. The EMR could also provide opportunities for
new business models and services to emerge. For example, a capacity
mechanism could provide an opportunity for aggregation service
providers, who could help small-scale energy users to participate
in the mechanism by drawing together small-scale electricity demand-side
responses which can bid into the capacity mechanism.
249. The Electricity Market Reform proposals are
unlikely to have a major impact on UK competitiveness except in
the case of electricity intensive industries that are exposed
to international competition.
250. A number of submissions to this inquiry warned
that the Government is not doing enough to engage consumers in
the EMR process and that this could reduce the political acceptability
of the proposals. Professor Helm said:
My fear is that, by about 2015-16, the costs
of wind will start to feed through to bills on a quite substantial
scale. The public, having been led to believe that this is essentially
a free lunch, will, by the middle of this decade or slightly later,
face sharply rising bills. The danger then is that they will lose
faith in the climate change objectives.
251. The problem is compounded by the fact that some
measures in the reform package (namely the CPS) are likely to
boost profits and could even deliver windfalls to electricity
companies (see section 7). Public reaction to increased profits
at a time of rising consumer bills will be unfavourable. Potential
investors are aware of this. For some, the problem is so big that
it undermines the credibility of the entire EMR package.
252. The aim of the Electricity Market Reform
is to remove barriers to investment in new energy infrastructure.
It is therefore extremely worrying that some investors find the
Government's commitment to managing the cost impact of the proposals
insufficiently credible. A lack of awareness among consumers that
bills are likely to increase over the next decade may hamper take
up of domestic energy efficiency schemes such as the Green Deal.
The Government should explain clearly the likely impacts of Electricity
Market Reform on energy bills and the ways in which consumers
can mitigate this through energy efficiency. The roll out of
smart meters could trigger consumer engagement and be one means
of communicating this message.
277 DECC, Electricity Market Reform Consultation
Document, Cm 7983, December 2010, pp 103-104 Back
Q 188 Back
Q 207 Back
Q 355 Back
Q 344 [Ms Gallagher] Back
Q 352 Back
DECC, Electricity Market Reform - options for ensuring electricity
security of supply and promoting investment in low-carbon generation,
Impact Assessment, 14 December 2010 Back
Q 354 [Ms Gallagher] Back
Q 354 [Ms Gallagher] Back
Q 341 Back
Ev 162 (WWF-UK), Ev 206 (Friends of the Earth), Ev 195 (Greenpeace),
Ev 208 (GE Energy) , Ev w45 (IET) , Ev 216 (RenewableUK) Back
Q 365 Back
Ev w10 (CHPA) Back
Q 63 Back