Energy and Climate Change CommitteeWritten evidence submitted by the Renewable Energy Association

REA EVIDENCE TO THE ECC COMMITTEE INQUIRY ON ENERGY PRICES. ADDRESSING QUESTION

What factors determine energy prices (wholesale prices, company operating costs, green levies, company profits etc)? What contribution do these factors currently make towards a typical household energy bill and how might this change over time?

The Renewable Energy Association represents renewable energy producers and promotes the use of all forms of renewable energy in the UK across power, heat, transport and renewable gas. It is the largest renewable trade association in the UK, with over 1,000 members, ranging from major multinationals to sole traders. For more information, see: www.r-e-a.net.

1.0 Executive Summary

1.1 Support for renewable energy is frequently blamed in the media, and by some politicians, for escalating energy bills. However, the reality is that in 2012 support for renewable energy was responsible for just 1.6% of household energy bills. In recent years wholesale gas prices have escalated sharply, and unpredictably. The UK is increasingly dependent on imports of gas.

1.2 Ofgem data shows that average dual fuel energy bills increased over £200 from 2010–12. A further round of price increases was announced since the publication of these figures. REA analysis showed only around 4% of this increase, over a comparable time period, could be attributed to renewable energy support. The UK could have delivered its 2020 renewable energy targets two to three times over for this £200 addition to household energy bills. Yet disproportionately little fuss is made about the cost of our dependence on volatile fossil fuel markets.

1.3 Government has a tendency to underestimate the price increase of fossil fuels. For example, we are now exceeding DECC’s “high” fossil fuel price scenario for the purposes of calculating the cost of delivering the 2020 renewable energy targets, as set out in the 2009 Impact Assessment to the Renewable Energy Strategy.

1.4 DECC analysis anticipates that the Renewables Obligation will add £48 to household energy bills in 2020. No breakdown has been provided by DECC of the anticipated contribution from renewables under the EMR CfD support costs estimated at £41 in 2020. With significant reductions being made in public support for renewable technologies this year (eg solar 20% reduction, onshore wind 10% in RO support), future public support will clearly be lower than historically. The Feed-In Tariff will add £6 to household energy bills this year, but REA modelling on the FIT scheme anticipated this as a result of the uncontrolled boom in solar power at the end of 2010/beginning of 2011. The FIT will rise at a much smaller rate in future under the new FIT control mechanism.

1.5 In addition to levying costs on households, renewables can contribute more broadly to household prosperity, for example, by providing jobs (REA/Innovas estimate up to 400,000 by 2020), avoiding increasingly expensive environmental externalities and by providing inflation-free sources of power. Furthermore some technologies, eg solar power, are reducing in price rapidly and will offer householders the prospect of cheaper power than grid electricity.

2.0 What proportion of household energy bills can be attributed to Renewable Energy?

2.1 Ofgem data shows average dual-fuel energy bills have risen by £205 in the past two years (July 2010 to July 2012) [See endnote 1]. According to Ofgem figures, the typical annual dual fuel bill has risen by over £200 in the last two years, from £1,105 in July 2010 to £1,310 in July 2012. See Ofgem: “Electricity and Gas Supply Market Indicators—1 August 2012”, 8 August 2012.1

2.2 Analysis by REA based on Ofgem/DECC data shows support schemes for renewables over a similar period have contributed around £4 to energy bill price increases.i That equates to 2% of total bill increases over the past two years. Or in other words, factors other than renewables subsidies are responsible for 98% of energy bill rises over the past two years. Furthermore, the subsequently announced new round of price increases means that renewables accounted for an even smaller proportion of energy bill rises.

2.3 Energy prices are comprised of a number of elements. Ofgem’s factsheet “Updated household energy bills explained”,38 list these components as: Wholesale energy, supply costs and profit margin; Distribution charges; Transmission charges; VAT; Environmental charges; and Other costs. Figure 2.3 shows the current proportions of these factors in average gas and electricity bills, with “Environmental costs” contributing 6% and 11% to these respectively.

2.4 “Environmental costs” includes all Government programs to save energy, reduce emissions and tackle climate change. The latest estimate is that these currently amount to around £82 on an annual bill2 and whilst they do impact on price suppliers charge for energy bills, some of these programmes do help to reduce the costs of bills for vulnerable groups.

Figure 2.3

OFGEM BREAKDOWNS FOR GAS AND ELECTRICITY BILLS (DECEMBER 2012)38

2.5 A third of the “environmental costs” of electricity bills can be attributed to the Energy Company Obligation (ECO) and a third to other environmental costs which have not been specifically stated. Renewable energy makes up the final third adding £27 to household bills this year; £21 from the Renewables Obligation (RO) and £6 from Feed-in-Tariffs (FiTs).38 When separating these “environmental costs” out, the RO formed 2.8% of electricity bills in 2012 whilst FiTs formed just 0.8%, see figure 2.5.

Figure 2.5

ADAPTED FROM OFGEM FURTHER BREAKDOWN OF ELECTRICITY BILLS (DECEMBER 2012), INDICATING THE PROPORTION OF THE RO AND FITS.

2.6 Whilst policies for renewable energy have had a small impact on electricity bills, they have had no impact on gas bills. This is a result of the Government’s decision to fund the RHI through general taxation rather than a levy on fossil fuel suppliers. The emphasis on biomass at the commercial scale means renewable heat support is relatively lower than for electricity technologies. Only £4.75 million has been spent to date according to Ofgem data on the RHI scheme. £22 million is the estimate for the current financial year according to DECC analysis.

3.0 What proportion on energy bills has been spent on Renewable Energy policies in the past?

3.1 According to analysis by the CCC, the average dual-fuel energy bill for a typical household increased from around £605 in 2004 to £1,060 in 2010. Of the total £455 increase, approximately £290 was due to the increase in the wholesale price of gas; around £70 can be attributed to increasing transmission and distribution costs; £20 to VAT; £45 to policies funding of energy efficiency in improvements in homes; and around £35 due to policies supporting investment in low-carbon power generation. In line with this analysis over 80% of the increasing in energy bills between 2004 and 2010 were unrelated to low-carbon measures.3

3.2 Figure 3.2, produced by the CCC3, shows the breakdown of the change in retail electricity prices from February 2004 to January 2011 (an increase of 5.7 p/kWh). As is illustrated the change was mainly due to wholesale generation costs with renewables representing a much smaller percentage of the increase.

Figure 3.2

CCC BREAKDOWN OF THE CHANGE IN DOMESTIC RETAIL ELECTRICITY PRICES (FEBRUARY 2004–JANUARY 2011)39

4.0 What is the projected impact of Renewable Energy policies on energy bills in the future?

4.1 DECC: Estimated Impacts of our policies on Energy Prices40

4.1.1 In November 2011 DECC released a report on the “Estimated impact of energy and climate change policies on energy prices and bills”.4 The report estimated the contribution of individual climate change policies on average retail gas and electricity prices paid by UK household for the years 2020 and 2030, see figure 4.1.1. As can be seen, when looking at the FiTs, the RO and the EMR, these policies are predicted to comprise a larger proportion of energy bills in 2020 than in 2011. However the impact of these policies on the energy prices is then forecast to decrease in the longer-term to 2030 whilst the “base prices” (energy prices excluding policies) are expected to continually increase from 2011 to 2030 as a result of a rise in the wholesale prices.

Figure 4.1.1

DECC ESTIMATED IMPACT OF ENERGY AND CLIMATE CHANGE POLICIES ON AVERAGE RETAIL GAS AND ELECTRICITY PRICES PAID BY UK HOUSEHOLDS (INCLUDING VAT)40

4.1.2 This analysis makes the important point that what matters to householders is their net energy bill, not the cost of electricity per kWh. Household bills can be reduced very significantly through successful energy efficiency measures. It is important, for the growth of renewable energy, that energy efficiency schemes are successful.

4.1.3 However, given the volatility of energy prices, this analysis is clearly only an estimate and should be seen as such. It is therefore surprising that such detailed figures have been used.

Figure 4.2.1

DECC ESTIMATED IMPACT OF ENERGY AND CLIMATE CHANGE POLICIES ON AVERAGE HOUSEHOLD ENERGY BILLS IN YEAR 202041

4.2 DECC: Policy impact on prices and bills41

4.2.1 DECC calculate that while low-carbon policies may add to consumer bills over the coming years, their presence may reduce average household bills by 7% by 2020 in comparison to if such policies were not present, see figure 4.2.1.5 However, there are a lot of assumptions made in this calculation.

4.2.2 The REA would like to see clearer assessments of projected renewable energy support costs. Impact Assessment are often overlaid on previous policies or mixed up with “low carbon” measures, so there is no clear assessment of expected renewable energy support costs (the EMR CfD IA is a case in point). The renewables industry has nothing to hide from the public as the case for investment in renewable energy is so strong. In fact the opposite is true—accurate costs help us to reduce the fear generated by hysterical overestimates in the media.

4.2.3 Ultimately, as wholesale prices are expected to rise over the coming years, energy bills are likely to increase with or without the influence of policies. If the UK did not have low-carbon policies our energy bills may well be higher, as shown by figure 4.2.1. Furthermore, if we didn’t have these policies our energy supplies would be even more dependent on imports and thus more vulnerable to the volatile global fossil fuel prices, and to security risks. Therefore whilst polices supporting renewables, such as the RO and FiTs, may add to costs in the short-to-medium term, in the long-term they work to reduce the vulnerability of UK energy prices to the unstable global fossil fuel prices.41

4.3 DECC: 2050 Calculator6

4.3.1 The 2050 Calculator shows that the total “cost of the energy system” today is around £3,700 per person, per year, and that if we do not tackle climate change, the total cost of the energy system could be £4,682 per person, per year, on average over the next 40 years.7

4.3.2 The calculator also indicates that if the UK did nothing to tackle climate change, the proportion of our energy we get from imported fossil fuels will rise from around 23% in 2007 to 53% in 2020 and 88% in 2050, meaning that our spending on net imported fossil fuels would rise from around £10 billion today to £32 billion in 2020 to £86 billion in 2050. This would leave the UK more vulnerable to fossil fuel shortages and price spikes. However, if we meet our 80% target, then by 2050 imported fossil fuels could account for only 7–30% of our energy, at a cost of £8–24 billion.

4.4 McKinsey & Company: Roadmap 20508

4.4.1 A study by McKinsey and Company42 supports what has already been suggested, finding that “[f]inal energy consumption is lower for the decarbonized pathways across the full energy system (aggregated demand for power, oil, gas, coal, etc.). This is driven by energy efficiency improvement in the power, transport, industry and buildings sectors, including gains due to the higher end-to-end conversion efficiency of heat pumps and EVs compared to what they are replacing. Furthermore, the decarbonized pathways use less oil, a relatively costly primary energy source” see figure 4.4.1.

4.4.2 The same study further reports that “[s]ensitivity analyses show that a doubling of the fossil fuel prices depresses the GDP in the decarbonized pathways by 0.3 to 0.5% less than it would in the baseline across the 40 years, showing the benefits of a lower dependency on fossil fuels.” (See page 84).

Figure 4.4.1

MCKINSEY & COMPANY: ROADMAP 2050, (PAGE 82)42

4.5 European Commission: “The Commission’s Energy Roadmap 2050 Press Release”, 15 December 20119

4.5.1 The analysis shows that [the] costs [of decarbonising the EU energy supply] will be roughly at the same level as if we were not to do anything. If we continue current policies, the total energy system cost—including fuel, electricity and capital costs, investment in equipment, energy efficient products—could represent 14.6% percent of European GDP in 2050 (compared to 10.5% in 2005).”

4.5.2 “[Electricity prices] rise until 2030 because capital, grid and fuel costs rise and auctioning payments will increase. Until that year, the increase of electricity prices is roughly the same in all scenarios, regardless whether we stick to our current energy mix or go for decarbonisation, eg high renewable share.”

5.0 Conclusions and final comments

5.1 We are confident that, with support today, some renewable energy technologies are likely to be competitive with grid energy prices before the end of this decade. Mass market technologies like solar power, are likely to have a broader transformational effect on the market. Consumers will increasingly be able to choose between autogeneration with onsite renewable sources of energy and purchasing energy from suppliers/the grid. This will enhance competition, providing broader consumer benefits. The UK stands to greatly benefit from the redefinition of the market and consumer choice, given our electricity sector is highly consolidated.

5.2 There is a lot of public commentary and media speculation that shale gas will transform the cost of energy in the UK. In the REA’s experience there is a lack of reputable research on which to base these claims. We understand the US experience is distinct, for example because of the lack of export infrastructure which led to a lower price for domestic consumption. The REA has no in-principle objection to shale gas and indeed cheap gas could help aid the transition to a low-carbon system. However, there is a danger that the promise of cheap gas could act to slow the transition to renewable energy, particularly by decision-makers who are opposed to renewable energy, or to climate or carbon objectives for ideological reasons.

5.3 Benefits of renewable energy investment for householders

5.3.1 It is a perennial frustration for the REA that while the costs of renewable energy are routinely quantified, the benefits are not subject to systematic quantification. Benefits include balance of trade benefits, employment, exports, security (including defence), price stability and HMT tax revenues.

5.3.2 The only assessment we are aware of, of broader benefits was by DECC on the wider economic benefits for the UK economy of reducing reliance on volatile fossil fuels with the reduction of price-shock risk. Oxford economics.

February 2013

Reference

i According to a written Parliamentary questions answered by Charles Hendry on 19 June 2012 the estimated average amount added by the RO/FITs directly to a household electricity bill in 2010–11 is “£18 for the RO and 20p for FITs.”

Please note that the RO/FIT 2010–11 period runs from April 2010 to April 2011. It was not possible at this stage to obtain data for exactly the same period as above July 2010–July 2012 to compare directly to renewables support. This is therefore an approximate of increases in renewables support over a similar period.

To read Charles Hendry’s answer in full, visit:

http://www.publications.parliament.uk/pa/cm201213/cmhansrd/cm120619/text/120619w0002.htm#1206202000086

Ofgem anticipates that the RO/FITs will add £22 to electricity bills this year (2012). This will comprise £21 for the RO and less than £1 for FITs. See “Updated household energy bills explained”, 31 May 2012, p. 3. Available at: http://www.ofgem.gov.uk/Media/FactSheets/Documents1/household-bills.pdf

1 www.ofgem.gov.uk/Markets/RetMkts/rmr/smr/Pages/indicators.aspx

2 http://www.ofgem.gov.uk/Media/FactSheets/Documents1/household-bills.pdf

3 http://downloads.theccc.org.uk.s3.amazonaws.com/Household%20Energy%20Bills/CCC_Energy%20Note%20Bill_interactive_1.pdf

4 http://webarchive.nationalarchives.gov.uk/20121217150421/www.decc.gov.uk/assets/decc/11/about-us/economics-social-research/3593-estimated-impacts-of-our-policies-on-energy-prices.pdf

5 https://www.gov.uk/policy-impacts-on-prices-and-bills

6 http://2050-calculator-tool.decc.gov.uk/pathways/11111111111111111111111111111111111111111111111111111/primary_energy_chart

7 Results based on 2050 Calculator

8 http://www.roadmap2050.eu/attachments/files/Volume1_fullreport_PressPack.pdf

9 http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/11/914

Prepared 26th July 2013