Energy subsidies - Environmental Audit Committee Contents


2  The rationale for energy subsidies: Pro-poor policy

15.  At a global level, the use of energy subsidies in developing countries is often derived from policies to help protect those countries' poorest citizens. Subsidies are a readily available policy instrument when such countries have their own domestic energy resources. However, those benefits, when applied as blanket subsidies for all consumers are "inefficient economic and social assistance systems" because, as Peter Wooders of Global Subsidies Initiative told us, "everybody benefits ... particularly people who use more, and that just does not seem to make sense if your target is to protect the poorest. ... The UK VAT exemption has some of those characteristics too".[39] The World Bank calculated in 2008 that in developing countries with fossil fuel subsidies, the poorest 40% received only 15-20% of the benefit.[40] Similarly, the IMF found that the poorest 20% of households typically receive less than 7% of the benefit.[41]

Lower VAT rates

16.  The OECD, using its subsidy calculation methodology, identifies the main element of energy subsidy in the UK as a lower-than-normal VAT rate of 5% on energy bills. Domestic and small business use of oil, gas, coal and electricity (whatever the original fuel source) are all charged at 5%. Dr Blyth told us that this practice is unusual, with most European countries taxing energy at the standard rate of VAT.[42]

17.  A March 2013 report from the Joseph Rowntree Foundation[43] considered ways in which a carbon taxation regime might be structured to remove what its authors described as the "environmentally perverse subsidies" inherent in the current system. Prof Paul Ekins, one of the authors, discussed the report's findings with us. One of his revenue-neutral proposals was to raise the rate of VAT on household energy bills to 20%, from a current rate which he saw as a regressive subsidy benefitting high-income households who tend to consume more energy, and using the extra revenue generated by the higher VAT to provide targeted compensation to low-income households through Universal Credit and Pension Credit.

18.  The Energy Minister, however, did not agree that the 5% lower rate of VAT on household energy bills represented subsidy, in part because VAT on energy had always been low and had not actually been reduced from the higher standard rate.[44] The review of energy bills instigated by the Prime Minister, which we discuss below, would not examine the scope for using a higher rate of VAT on bills to finance more targeted financial support for the poorest households.[45]

Fuel poverty

19.  The Government centres pro-poor policy in the UK on its measurement of 'fuel poverty'. This is currently measured in terms of households needing to spend more than 10% of their income on fuel "to maintain an adequate level of warmth".[46] In 2011 DECC calculated that, on that basis, there were 4.5m households (17%) in fuel poverty in the UK, including 3.2m (15%) in England.[47]

20.  In July 2013, DECC published Fuel poverty: A framework for future action, which signalled the Government's intention to change the definition of 'fuel poverty' following the Hills review.[48] The new target would be focused "on improving the energy efficiency of the homes of the fuel poor". Under a new indicator, households will be deemed as fuel poor "if they have above average fuel costs and were they to spend that amount on fuel they would be left with a residual income below the official poverty line". Under the new measure there were 2.4m households (11%) in fuel poverty in England in 2011[49] (compared with 3.2m under the old measure). In financial terms, the 'fuel poverty gap' of those English households with costs above 10% of their income was £1.05bn, or £438 for each fuel-poor household.[50]

21.  The Government has amended the Energy Bill in the House of Lords to reflect this change of definition, and to change the provisions in the Warm Homes and Energy Conservation Act 2000 to no longer require the "elimination" of fuel poverty by 2016, but instead allow fuel poverty to be "addressed" by a date to be set later by secondary legislation.[51] The Energy Minister said that the new measure had the advantage that it did not just address the proportion of income needed for energy bills, but also the level of households' wealth or poverty: "The new definition allows us to understand much better what the actual depth of fuel poverty is in a particular household rather than simply the extent of it."[52]

Prime Minister's review of energy bills

22.  On 23 October, the Prime Minister told the House:

We need to roll back some of the green regulations and charges that are putting up bills. ... What we need to do is recognise that there are four bits to an energy bill: the wholesale prices, which are beyond our control; the costs of transmission and the grid, which are difficult to change; the profits of the energy companies; and the green regulations. It is those last two that we need to get to grips with. So I can tell the House today that we will be having a proper competition test carried out over the next year to get to the bottom of whether this market can be more competitive. I want more companies, I want better regulation and I want better deals for consumers, but yes, we also need to roll back the green charges that [the Leader of the Opposition] put in place as Energy Secretary.[53]

The Deputy Prime Minister was reported the next day as saying that the Government "will stress-test all these different levies", and that a review of environmental policies might involve them being funded in future "from taxes rather than green levies".[54] The Energy and Climate Change Committee took evidence later that month, for its inquiry into energy prices, from the big energy companies, during which the significance of the green levies was discussed.[55]

23.  DECC's most recent analysis of the component parts of energy bills was published in March 2013. It lists 18 'energy and climate change policies'[56], which add £112 (9%) to an average dual-fuel bill in 2013.[57] Just over half of that was for "energy efficiency and helping the very poorest households" (eg. Energy Company Obligation and Warm Home Discount) and just under half "going towards supporting home grown low carbon sources of energy" (eg. Renewables Obligation, EU Emissions Trading System and Carbon Price Floor payments and Feed-in tariffs).[58] Some levies are taxes, such as EU Emissions Trading System and Carbon Price Floor payments, whereas some are subsidies—Renewables Obligation and Feed-in tariffs.[59]

24.  While some of the individual levies are not currently significant, overall they make up, in the Energy Minister's words, a "sizeable" element in bills,[60] and the 'cost of policies' in energy bills is forecast to increase.[61] However, that is not the complete picture. While DECC expect prices of energy to rise, they also expect bills to be less than they would otherwise be, because some policies are aimed at reducing consumption through greater energy efficiency. DECC calculate that policies will not add significantly to gas prices in 2020 or 2030, and once the impact of energy efficiency policies on consumers is felt their bills will be 13% less (£107 in today's terms) than they would otherwise be by 2030. For electricity, prices will be 41% higher than they would otherwise be by 2030, but bills 10% higher than they would otherwise be (£67 in today's terms). Overall, DECC calculate, bills will be less than they would otherwise be in 2020 by 11%, or £166, and in 2030 by 3% or £41.[62]

25.  On 21 October 2013, the Committee on Climate Change published a note repeating its earlier analysis of the costs of green policies. It stated:

Energy bills will have to increase by around £10 (1%) to cover costs of low-carbon policies in 2013-14.

Very significant energy bill increases from 2004 to 2012 have been mainly due to increases in the price of gas in international markets, with only a small part of the increase due to low-carbon policies.

Energy bills are expected to increase by around £100 in 2020 due to low-carbon policies. This comprises around £70 related to the Electricity Market Reform and £30 due to the carbon price underpin.

A further £20 increase per household will be required from 2020-2030 to support low-carbon investments. This would be sufficient to meet the proposed target to reduce the carbon-intensity of power generation to 50 gCO2/kWh by 2030. Bills would then be expected to fall from 2030.[63]

26.  The Energy Minister told us that an aim of the review announced by the Prime Minister was to examine "where there are additional levies imposed on top of the bill, these are as fair and as reasonable as necessary".[64] He could not, however, give us an indication of where any change might be made as a result of the review.[65]

27.  Energy subsidies play an important and justified role in alleviating fuel poverty, which remains a significant challenge. The Government's proposed change of definition of 'fuel poverty' and weakening of the legislative commitment—to 'address' it rather than 'eliminate' it—will place a greater imperative on the Government to demonstrate that it is committed to making fuel poverty a thing of the past. Unless the Government is prepared to make that commitment and show how it will be delivered, the changes to the fuel poverty definition and target, in part being made through amendments to the Energy Bill, should be stopped.

28.  The Government is undertaking a review to examine the scope for reducing 'green levies' in energy bills. While such levies currently account for 9% of bills, they may not increase bills in the longer term because they will drive energy efficiency. The review cannot significantly assist the poorest bill-payers in the short term simply by scrapping some green levies, because the biggest component of such charges in bills—the Energy Company Obligation and Warm Home Discount—is currently already directed at them (paragraph 23). If the review finds some levy savings in energy bills, perhaps by shifting them to general taxation, the imperative for energy efficiency measures must remain the priority because of the underlying need to tackle climate change by reducing our emissions.

29.  To aid transparency, if the Government introduces its proposed new measure of fuel poverty, it should also continue to publish statistics on the current metric for the remainder of this Parliament, alongside the new figures. In the Autumn Statement, the Government should make clear how any changes to green levies will change the amount that those in fuel poverty will have to pay, by how much and how soon.


39   Q61 Back

40   World Bank Independent Evaluation Group, Climate change and the World Bank Group: Phase 1: an evaluation of World Bank win-win energy policy reforms (2008) Back

41   Time to change the game: Fossil fuel subsidies and climate, op cit.  Back

42   Ev 64, para 2.2 Back

43   Joseph Rowntree Foundation, Designing carbon taxation to protect low-income households (March 2013)  Back

44   Qq241-244 Back

45   Q244 Back

46   HC Deb, 28 October 2013, col 366W Back

47   DECC, Annual report on fuel poverty statistics 2013 (May 2013), Section 2.1 Back

48   DECC, Fuel poverty: A framework for future action (July 2013) Back

49   DECC, Fuel poverty report: Updated August 2013 (August 2013), Section 2.1 Back

50   ibid; HC Deb, 6 November 2013, col 207W Back

51   HL Deb 11 July 2013, col GC129 Back

52   Qq239, 240 Back

53   HC Deb 23 October, col 293-4 Back

54   BBC Radio 4, Today programme (24 October 2013) Back

55   Oral evidence taken before the Energy and Climate Change Committee on 29 October 2013, HC (2013-14) 773 Back

56   DECC, Estimated impact of energy and climate change policies on energy prices and bills (March 2013), Annex B Back

57   Q220; Estimated impact of energy and climate change policies on energy prices and bills, op cit, Table D1 Back

58   ibid Back

59   Q227 Back

60   ibid Back

61   ibid Back

62   Estimated impact of energy and climate change policies on energy prices and bills, op cit, Table 3 Back

63   Committee on Climate Change, CCC analysis: low-carbon policies account for only a small part of energy bill increases (21 October 2013) Back

64   Q217 Back

65   Q227 Back


 
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Prepared 2 December 2013