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 subsidiesRenewables
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
commitmentto 'address' it rather than 'eliminate' itwill
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
billsthe Energy Company Obligation and Warm Home Discountis
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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