Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyWritten evidence submitted by Calor Gas Ltd
1. What is the size of the butcher’s bill?
1.1 The Secretary of State for Energy in his Foreword to the Draft Energy Bill talks of the need for investment of £110 billion in electricity generation and transmission this decade alone. He does not estimate the cost beyond that in the Foreword. The Draft Energy Bill is designed to engineer “electricity market reforms to incentivise this investment efficiently” (Foreword).
1.2 OFGEM’s figure is nearly double that: “Ofgem’s Project Discovery, published in October 2009, highlighted the likelihood that energy bills will increase further over the next 10–15 years. We estimated that up to £200 billion of investment might be required by 2020 alone,” (Energy Affordability, published by OFGEM, 30 March 2012). This £200 billion is the most commonly—if rather loosely—used figure for the investment required in the UK’s energy infrastructure.
1.3 This £200 billion figure is consistent with OFGEM’s Project Discovery projections and with the original Draft National Policy Statements for Energy and was based on what we would regard as an optimistic view that grid peak demand would remain flat at 60GW to 2020. But, in the Revised NPS (October 2010), postdating Project Discovery, the full implications of a pure electricity play including the electrification of transport and heat were glimpsed for the first time: “Generation capacity will need at least to double to meet this demand and, if a significant proportion of our electricity is supplied from intermittent sources, such as wind, solar, or tidal, then the total installed capacity might need to triple” (para.1.66).
1.4 This is an astonishing admission, with no doubt a similarly astonishing, and not yet revealed, cost. We believe that the commonly quoted £200 billion figure relates to the original target and not to the doubling or tripling of existing capacity. If energy companies do find the resources to invest in doubling to tripling the generation capacity ultimately they must hope that the consumer of their electricity will pay for the increased cost of their electricity. We should have transparency as to what that will mean for the consumer and taxpayer by way of increased bills and subsidies.
1.5 In February 2012, David Clarke, the Chief Executive Officer of the Energy Technologies Institute in giving the Biennial Bridge Lecture to the Worshipful Company of Engineers stated that the country’s electricity use was generally between 30GW and 50GW in winter and summer. However, the amount of gas used for heating reaches a peak six times that level in the winter. He said that meant that a switch to electric heating would mean building an electricity distribution network six times larger than the existing one. “That would cost much more than six times the £95 billion cost of replacing the current network,” he said.
1.6 So, can The ECC Select Committee extract from Government the true likely total cost of the requisite energy infrastructure by 2050 under current policies? Is it £200 billion, £570 billion or more? This is a critical figure to know when addressing the problem of energy affordability. Unless we know how much energy infrastructure is going to cost we are lacking the most basic information. The Government must come clean on the size of the bill needed to underpin its energy and climate policies
2. To what extent, and with what damage does the Draft Bill move away from competition as an instrument of policy?
2.1 Paragraph 80 of the Draft Bill refers to the energy policy of the 1990’s “successfully using competition to drive down energy prices”. Clause 41 of the Bill, as the Explanatory Notes indicate, refers to the duty of the Secretary of State and the Gas and Electricity Markets Authority (GEMA) to carry out functions in the manner best calculated to protect the interests of existing and future consumers, wherever appropriate by promoting competition. There are two aspects of Government policy being deployed which are by the nature, and by explicit intent, anti-competition—the use of subsidy and the cherry-picking of technologies. We can see a role for limited subsidy, particularly where there is market failure, but subsidies can be so distorting that they can kill true competition. The Select Committee may be minded to establish how far Government subsidies, costly in themselves to fuel consumers since they largely fund them, are anti-competitive. The cherry-picking of Government of very expensive technologies such as offshore wind—a report for DECC by Mott MacDonald, “UK Electricity Generation Costs Update” (June 2010) estimated the levelised cost of offshore generation to be £157–186/MWh, roughly twice that for onshore wind (£94/MWh). Offshore wind was by far the most expensive technology that MacDonald compared with gas (£80/MWh), coal with CCS (£104.5/mWh), nuclear (£99/MWh) and onshore wind (£94/MWh). Offshore wind has high and uncertain capital costs, carries high technology risks and high operational and maintenance risks—all admitted by HMG in a recent consultation paper. Why are we subsidising such poor value for money in such a risky and intermittent technology?
2.2 Government is indirectly cherry-picking technologies in other ways, such as enforcing changes in the Building Regulations. Indeed, HMG appear set on a pure electricity play in rural areas, gambling that heat pumps will prove to be sustainable (when all the experimental evidence collected by Government to date indicates they will not for the most part), and that the grid can be decarbonised. Insofar as fuels are removed from the market by Government policy (no more coal or oil power stations are likely to be built; and, LPG may be expelled from the new build market in 2013, for example). The Select Committee may also be minded to establish the extent to which Government cherry-picking certain technologies, and excluding others, indirectly reduce competition and thereby increases prices.
3. How badly will consumers be hit?
3.1 The first paragraph of the Secretary of State’s Foreword to the Draft Bill states, “It is essential to minimise the cost to the economy, to consumer bills and to taxpayers”. The self-inflicted bill is not insignificant. DECC’s own estimates for the impact on electricity prices in 2010 arising from its energy and climate change policies is +27%. The sticking plaster on this otherwise crippling blow to family finances was the claim by Mr Huhne in 2011 that by 2020 on average households would be paying on average 7% less to heat and power their homes because of policies taken in the round. Unfortunately, this average hides a big variation between households, and using DECC’s own questionably optimistic figures the Renewable Energy Forum calculated that 65% of households would be net losers from the policies ie the few will be gainers at the expense of the many (“Shortfall, Rebound, Backfire”, published by the Renewable Energy Forum, 21 May 2012).
3.2 In its January 2012 Research Note, Policy Exchange came to the same conclusions—two thirds of households will be worse off because of DECC policies. Policy Exchange estimated the full impact of renewable energy subsidies on an average household by 2020 (through bills, tax and costs of products and services) to be £400 per year—equivalent to 2.5p on VAT. This implies that by 2020 the total net cost (not just through energy bills) to the average household of carbon and renewable policies will be equivalent to around 15% of the (without policies) energy bill.
3.3 We are concerned about the potential economic impact of the Government’s energy and climate policies on social cohesion within the UK. OFGEM states there were 5.2 million households living in fuel poverty in 2009 in Great Britain (Energy affordability, op.cit). Despite a raft of measures under successive Governments the trend has been remorselessly upwards from 1.2 million in 1994. Whatever measures applied by Government to date, they are clearly ineffective. The going is, if anything, getting tougher. OFGEM has predicted a rise of up to 60% domestic fuel bills (Evidence to Energy and Climate Change Committee 2 December 2009). The Renewable Energy Strategy admitted: “Poorer households are likely to spend a higher proportion of their income on energy and so increases in bills will impact more on them”.
3.4 Professor Hills in his recent Fuel Poverty Review has proposed a new definition of fuel poverty to reduce this embarrassing figure, but redefining it will not lesson the eventual quantum of misery inflicted by a Government beggaring sections of its electorate. As Hills states, “In our central projections, the key fuel poverty gap indicator will rise by more than 50% between 2009 and 2016”. Such policies risk social unrest, and run against the Prime Minister’s pledge that green energy “must be affordable” (25 April 2012). Redefinitions may ease political pain, but not the practical experience of people struggling with their energy bills.
3.5 Redefining the parameters will not hide the damage done to large numbers of households. This is specified in two paragraphs of OFGEm’s “Energy Affordability” (op. cit):
“2.2 Difficulty affording fuel bills can have a number of impacts on households, including having to limit the amount they spend on other essentials such as food and living in a cold home because they fear the cost of putting the heating on. The worry of meeting fuel bills can also have psychological effects. This can be compounded where low income households have other concerns to deal with such as ill health, infirmity and disability, caring responsibilities, poor housing conditions and isolation.
2.3 Difficulty affording fuel bills can also have more extreme consequences. There were approximately 25,700 excess winter deaths in England and Wales during winter 2010
Recommendations
The Select Committee should establish an estimate of the total cost of the required energy infrastructure under current energy and climate change policies by 2020, 2030, 2040 and 2050, revising the now apparently outdated Project Discovery figures.
The Committee may also wish to clarify how far Government subsidies are anti-competitive and drive up fuel prices; and, how far Government cherry picking certain technologies and in effect excluding otherwise viable technologies from the market are having an inflationary effect on fuel pricing.
The regressive nature of the Government’s energy policies should be re-assessed. Redefining “fuel poverty” may save a degree of political embarrassment, but the current trajectory of fuel bills is such that it will bring misery for millions more, and even death for at least thousands.
June 2012