Electricity Market Reform - Energy and Climate Change Contents

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.[277] 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)
Domestic (£)
2010 £493 0% 0%0%
2011-2015 £477 1% 1%1%
2016-2020 £497 3% 2%3%
2021-2025 £559 5% 6%7%
2026-2030 £682 -1% -4%-3%
Average 2010-2030 £551 1.7% 0.9% 1.6%
Non-domestic (£000)
2010 £918 0% 0%0%
2011-2015 £948 1% 1%1%
2016-2020 £1,152 4% 3%4%
2021-2025 £1,401 6% 7%8%
2026-2030 £1,564 -1% -5%-4%
Average 2010-2030 £1,250 2.2% 1.3% 2.2%

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

Domestic consumers

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.[278]

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".[279]

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.[280]

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.[281]

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.[282]

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.[283] 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).[284] 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.[285]

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.

Business Consumers

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.[286]

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.[287] 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 years.[288]

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.[289]

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.

Political acceptability

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.[290]

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

278   Q 188 Back

279   Q 207 Back

280   Q 355 Back

281   Q 344 [Ms Gallagher] Back

282   Q 352  Back

283   DECC, Electricity Market Reform - options for ensuring electricity security of supply and promoting investment in low-carbon generation, Impact Assessment, 14 December 2010 Back

284   Q 354 [Ms Gallagher] Back

285   Q 354 [Ms Gallagher] Back

286   Q 341 Back

287   Ev 162 (WWF-UK), Ev 206 (Friends of the Earth), Ev 195 (Greenpeace), Ev 208 (GE Energy) , Ev w45 (IET) , Ev 216 (RenewableUK) Back

288   Q 365 Back

289   Ev w10 (CHPA) Back

290   Q 63 Back

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Prepared 16 May 2011