Chapter 3: Failures in the market
56.This chapter outlines two failures arising from the structure of the market and government interventions: first the potential insecurity of supply and second the impact on energy prices.
Failure 1: Insecurity of supply
57.The core purpose of government intervention in the market is to ensure that the supply of electricity is secure. The Secretary of State told us that: “Security is the sine qua non … That has to be the first duty of any Secretary of State who is responsible for energy.”64 This part of our report will consider the security of the electricity supply and in particular two issues that affect that security:
(a)Is there sufficient capacity generated to meet demand?
(b)Is the electricity supply consistent and reliable?
58.The section concentrates on security of electricity generating capacity. Whilst some witnesses raised concerns about the security of the gas supply and availability of gas storage this report concentrates on the electricity market and electricity supply only.65
The capacity margin
59.When considering the possibility of blackouts, or the ‘lights going out’, most witnesses were referring to the capacity margin. The capacity margin is the extent to which there is sufficient generating capacity to supply the projected demand for electricity. It is expressed as a percentage and is the average excess of available generation over peak demand. The types of available generation are adjusted to take account of the fact that not all theoretical generation will be available all of the time.66
The current capacity margin
60.In its Winter Outlook for 2016/17, National Grid predicted a capacity margin of 6.6 per cent when emergency measures to increase capacity are taken into account.67 Whilst this is slightly higher than the predicted margins in 2014 and 2015, it is considerably lower than the margins of more than 10 per cent of 2009 to 2012.68 As outlined in paragraph 22 above, the tightening of the capacity margin is due in part to the lack of incentives to private investors to build new conventional power plant.69
61.Witnesses were divided on whether the current margin was a cause for concern. Professor Dieter Helm, Professor of Energy Policy at the University of Oxford, said that “the capacity margins are effectively nought, so the security of supply problem is back with a vengeance.”70 Tony Lodge, of the Centre for Policy Studies, saw the possibility of blackouts in the near future and considered that a series of mild winters had suppressed demand and prevented any serious shortages.71 National Grid acknowledged this factor had helped them meet demand in the winter of 2015/16.72
62.National Grid themselves described the current 6.6 per cent margin as “manageable but tight”.73 The Secretary of State considered this level to be “more than adequate”.74 Martin Pibworth of SSE found the current margin to be “reassuring”.75 Mr Pibworth based his confidence on the tools available to National Grid to manage times of tight demand.76
Managing the Capacity Margin
63.In 2014, due to a sharp fall in the forecast capacity margin, the Government introduced two new balancing services to boost capacity (see Box 3 below). The Government credited the recent increase in the margin to these schemes.77 These tools are in addition to other measures already available to the Grid which include the ability to procure electricity through the interconnectors with other European countries (see Box 4).
Box 3: Contingency Balancing Services
|
Supplemental Balancing Reserve: the Government pays generators to make additional capacity available in winter, for example, by keeping on power stations that would otherwise be closed, mothballed or generally unavailable to the market. The costs of the service are recovered from generators and suppliers and then passed on to consumers. Demand Side Balancing Reserve: the Government pays larger companies to reduce their demand for electricity in winter by, for example, only turning on energy intensive machines at times of low demand on the Grid. The companies participating in the scheme are chosen through a tender process and payments (save for set up costs) are only made if the service is used.78 In the year to March 2016, National Grid spent £2.31 million on this service.79 In August 2016 National Grid announced that it would not be using the Demand Side Balancing Reserve in the winter of 2016/17.80 |
64.As well as the above short term measures, the Government has introduced the Capacity Market as a longer-term solution.
65.This policy will come into full effect in 2018. Under the scheme, the Government decides how much capacity it will need and a two-stage auction then takes place. Suppliers first bid to supply reserve power four years in advance, based on projected demand. A second auction is held a year before the power is needed to meet any change in the forecast. Those generators who successfully bid are then guaranteed there will be demand for the power that they produce.
66.Three auctions have been held to date for supply in 2018, 2019 and 2020. The ultimate cost of the Capacity Market is borne by consumers. In oral evidence Jeremy Pocklington estimated that the auctions to date have cost £1 billion.81
Reducing demand
67.As well as increasing supply the Government has sought to manage the capacity margin by reducing demand at peak times. The ‘Demand Side Response’—described by National Grid as “services that enable businesses and consumers to turn up, turn down or shift demand in real-time”—is an increasingly important tool in managing peaks and troughs in demand.82 The Demand Side Balancing Reserve (see Box 3) is one such scheme which aims to reduce heavy industrial use at peak times.
68.The Capacity Market explicitly includes demand side products. The importance of these services is projected to increase. For the year 2018/19, £3.4 million of the Capacity Market auction was spent on demand side response schemes. In the auction for capacity for 2020/21 these services accounted for £31.7 million.83
69.In the longer term, to work most effectively these services will rely on developments in storage technology to allow excess generation to be stored for use at times of high demand.84 We explore ways to encourage research and development in this, and other areas, in Chapter 4.
Criticism of the Capacity Market
70.The Government stated in its written evidence that the Capacity Market is “at the heart” of its plans to ensure a reliable electricity supply and designed to attract “sufficient investment in new generation capacity”.85 Dermot Nolan, the Chief Executive of Ofgem, described the Market as “well designed” and was hopeful that it would “bring on new forms of generation”.86
71.The auctions held under the Capacity Market so far have successfully procured capacity but only one new power plant. The auctions in 2014 and 2015 produced no new power stations. Finally, in the 2016 auction, one new combined cycle gas turbine station was approved. Defending this record, Jeremy Pocklington, Director General for Energy Security at the Department of Business, Energy and Industrial Strategy, stated that it is:
“important not to misunderstand exactly what the role of the capacity market is. We don’t want to use the capacity market to bring forward new investment before it is needed.”87
72.The main beneficiaries of the auctions to date have been existing generators. The Global Warming Policy Foundation was concerned that the effect was to keep “old power plants on grid” and this was not a long-term solution.88 The energy generator Drax Group (the operator of one of the last coal fired power stations) pointed out that this had the effect of “relegating” gas and coal plants to a “peaking role” and meant that operators had a very limited window in which to cover their costs. Drax considered that this led to a risk of under investment in the maintenance of such facilities.89
73.Finally, the supply secured so far is from fossil fuels and includes a large number of small diesel generators. Professor Hepburn, Professor of Environmental Economics at the University of Oxford, noted that this is “inconsistent with ultimate decarbonisation objectives”.90
74.The UK currently has a slim capacity margin. The emergency tools available to the Grid to manage the margin have been effective in the short term. The Government has struggled to procure sufficient numbers of new power stations through the mechanism to ensure longer-term security of supply.
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Interconnectors are electricity generation cables that allow the cross-border transfer of electricity. Electricity may be exported as well as imported via the interconnector. The UK has four such cables and a further seven are at various stages of planning as illustrated on the map below. Currently, two of the four existing interconnectors are not operating at full capacity and problems in the French electricity market call into question whether the interconnector to France will allow as much electricity to be imported as originally envisaged.91 Interconnectors are both a tool for managing supply and a source of potential future uncertainty. National Grid said that the interconnectors system: “allows the UK access to cheaper energy for consumers, provides the [systems operator] access to a wider suite of balancing tools to manage the network more efficiently and support the UK’s security of electricity supply at least cost.”92
Under normal circumstances, electricity flows automatically from the market with the lowest price to the market with higher prices via the interconnector.93 There is, however, no guarantee of supply frm the interconnectors. The House of Lords Science a Technology Committee considered there was “a worrying lack of clarity” about how the interconnectors would operate if a number of interconnected countries simultaneously experienced a shortage of supply.94 Ofgem and National Grid told this Committee that in the event of such an emergency they could intervene and manage the flow of the interconnectors.95 National Grid, in written evidence, pointed out that the current interconnector arrangements rely on the European Union’s Internal Energy Market.96 National Grid considered that alternative arrangements would need to be negotiated when the UK leaves the European Union. National Grid expressed concern that these methods were “unlikely to be as effective or efficient” as the developing Internal Energy Market, presumably this would also be the case for other countries.97
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Source: Map adapted from House of Lords Science and Technology Committee, The Resilience of the Electricity System (1st Report, Session 2014–2015, HL Paper 121)98
Intermittency and reliability
75.The second aspect of security of supply raised in evidence before us was the reliability and consistency of existing forms of generation. Ofgem stated that this was a different, but possibly equally significant, aspect of security of supply:
“Historically, capacity margins were the main security of supply indicator. However, they fail to fully take into account the variability of supply, especially when the share of intermittent power generation sources increases in the system.”99
76.Dr John Rhys, former Chief Economist for the Electricity Council, also saw “different kinds of supply shortfall crises”. He suggested that “a system heavily dependent on renewables … could face longer periods of sustained shortage”.100
77.The price of this intermittency—the cost of ensuring back-up generation in the event that renewable energy cannot be generated—was estimated to be “certainly less” than £10 per megawatt hour.101 Rupert Darwall considered that the design of the system and the fact that the renewable generators themselves do not directly pay this cost had far reaching consequences:
“[wind and solar] have very high fixed costs and negligible marginal costs. That means that when the wind blows and the sun shines they flood the wholesale market with near zero-cost power, but the weather risk, the intermittency risk, because they have prior access, is transferred to the rest of the system. It is transferred to dispatchable generators, gas and coal-fired generators, which has made it increasingly difficult to get that capacity renewed.”102
78.Some witnesses considered that it was unfair to brand renewables as more unreliable than other source of electricity generation. Michael Liebreich, founder of Bloomberg Energy Finance, pointed out that “every form of generation has times when it does not generate.”103 Phil Sheppard of National Grid stated that the “market manages most of the intermittency” using gas power plant and the interconnectors.104
79.Tom Burke, Chairman of 3EG, argued that National Grid has an “enormously sophisticated package of measures available” to deal with a situation where there is limited or no renewable generation.105 Professor Grubb, of University College London, stated that these tools were preferable to each intermittent source paying for its own back-up capacity. He considered this would result in a “vast amount of overcapacity and redundancy”.106
80.The increased amount of electricity generated from intermittent sources presents new challenges for security of supply. As the proportion of electricity from these sources is projected to increase, tools to ensure cost effective back-up must be available and the cost of appropriate back-up incorporated into estimates of the cost of renewable generation.
Failure 2: Energy prices
81.Consumers ultimately pay for the climate change policies that have been outlined above through their electricity bills. This section will examine those bills, see how they compare with similar countries and attempt to identify how much domestic and industrial users are paying for those climate change policies.
Domestic electricity prices
82.Average domestic electricity bills in Britain, adjusted for inflation, were 58 per cent higher in 2016 than they were in 2003.107 This increase has been mainly driven by rising international prices for fossil fuels. The cost to consumers of low carbon policies has also been a factor: estimates from the Committee on Climate Change indicate that climate change policies accounted for around two per cent of the average domestic bill in 2004 and 10 per cent in 2013.108
83.It is difficult to find reliable estimates for the proportion of electricity bills that relate to climate change policies: the Government does not include it as part of its regular energy price statistics. In 2014 the Department for Energy and Climate Change did however publish a stand-alone report which concurred with the estimate above that around 10 per cent of bills relate to climate change policies. Table 3 reproduces the breakdown of the average 2014 electricity bill from the report.
Table 3: Breakdown of the average household electricity bill for 2014109
Component |
Cost (and percentage of total bill) |
|
Wholesale energy costs |
£235 (40%) |
|
Network costs |
£139 (24%) |
|
Supplier costs and margins |
£124 (21%) |
|
Energy and climate change policies |
£59 (10%) |
|
VAT (at 5%) |
£29 (5%) |
|
Total |
£586 |
Source: Department of Energy & Climate Change, Estimated impacts of energy and climate change policies on energy prices and bills: 2014 (6 November 2014): https://www.gov.uk/government/publications/estimated-impacts-of-energy-and-climate-change-policies-on-energy-prices-and-bills-2014 [accessed February 2017]
84.The report also made projections as to how bills would look in 2020 and 2030. It estimated that the proportion of bills relating to climate change policies would increase to 24 per cent in 2020 and 26 per cent by 2030.
Competition and Markets Authority investigation
85.Last year the Competition and Markets Authority concluded an investigation into the electricity market which found that around 70 per cent of domestic consumers of the six largest energy firms are on the more expensive ‘default’ standard variable tariff. They estimated that on average between 2012 and 2015, customers had been paying around £1.4 billion a year more than they would have done in a more competitive market.110
86.The CMA recommended that Ofgem should “establish a programme to provide customers with information to prompt them to engage and switch supplier” and “create a database of ‘disengaged customers’ on default tariffs, to allow rival suppliers to prompt these customers to switch; and a short term price cap for those on pre-pay meters.” The Government has yet to respond to the CMA’s recommendations.
87.Professor Helm disapproved of the notion that a database and greater switching would solve the problem. He said that people “do not have to spend their nights on the computer working out the latest complex deal offered by whichever energy company it happens to be. People just want a standard variable tariff that charges a reasonable margin and passes through the wholesale cost and the fixed costs that they have to pay.” He also pointed out that wholesale prices had fallen substantially in recent years but “retail electricity prices have gone down not one iota to reflect that massive cost fall, but the Competition and Markets Authority thinks that is fine or at least it thinks that it is solved by switching.”111
88.Electricity companies argued that the failure to pass on the fall in wholesale costs was due to them buying electricity in advance. Dermot Nolan, Chief Executive of Ofgem, was quoted in January 2017 as saying that “if that argument is true on the way down, it has to be true on the way up as well.”112 Wholesale costs are now rising again. EDF Energy will raise variable electricity prices by 8.4 per cent from March this year but said that this was due to rises in non-wholesale costs with advance purchasing of electricity protecting customers from rising wholesale prices.113
89.The Secretary of State told us that he felt an obligation to consider the interests of those people who wouldn’t switch:
“One of the things on which I wish to reflect in considering the CMA remedies is whether the pro-switching recommendations, which may be important, are sufficient to deal with the detriment being suffered by people who do not switch. I was interested in the evidence you heard that, even in optimistic scenarios, it was felt there would still be large proportions of people who do not switch. I feel an obligation to consider what would be in their best interests as well.”114
90.Stephen Littlechild, a former Head of the Office of Electricity Regulation (a predecessor to Ofgem), submitted written evidence, signed by other former regulators115, that described the CMA’s estimate—that customers were paying £1.4 billion a year more than they needed to—as “implausible” and “based on a series of guesses rather than reality”. They thought the idea that more switching would translate into benefits for customers was “illusory” and did not think the fact that standard variable tariffs are higher than fixed tariffs was a problem:
“Existing customers may be on a standard variable tariff that will have to cover overhead costs as well as incremental costs. So the standard variable tariff will be higher than the fixed tariff. But this is not at the expense of existing customers: if suppliers lost existing customers and did not attract new customers by offering lower prices, then prices to existing customers would have to increase, not decrease, in order to spread overhead costs across fewer customers.”116
91.The Committee did not take extensive evidence on this topic and the evidence we did receive is contradictory. This is an unsatisfactory state of affairs. We welcome the Secretary of State’s commitment to consider this matter further.
Comparisons with other European countries
92.Domestic bills in Britain are around the average for similar European countries, as shown in Figure 3. The cost of subsidies for low-carbon generation in the UK are included in the cost of electricity bills.117 In most other European countries, these subsidies are levied on electricity bills as explicit taxes.
Figure 3: Domestic electricity prices for the average consumer118 across EU15 countries, including taxes, January to June 2016 (pence per kilowatt hour)
Source: BEIS, Domestic electricity prices in the EU (24 November 2016), Table 5.6.2: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/580186/QEP_Q316.pdf [accessed December 2016]
93.For much of the first decade of the 21st century, Britain had some of the cheapest domestic electricity bills amongst similar European countries: in the first half of 2011, bills for the average consumer in Britain were 25 per cent below the EU 15 median, today they are 4 per cent below the EU 15 median. Figure 4 shows how British domestic bills have gone from being the second cheapest in Europe in the mid-2000s to the seventh cheapest today.
Figure 4: UK ranking against EU 15 countries, where 15 is the most expensive domestic electricity prices for the average consumer and 1 is the cheapest, H2 1998 to H1 2016119
Source: Department for Business, Energy & Industrial Strategy, Domestic electricity prices in the EU (24 November 2016), Table 5.6.2: https://www.gov.uk/government/statistical-data-sets/international-domestic-energy-prices [accessed February 2017]
94.In 2014 10 per cent of the cost of electricity for domestic users was due to climate change policies. The Government’s own analysis indicated that this is expected to rise to around a quarter by 2020.120 This is not transparent however as the cost of the policies is incorporated into electricity bills, making it difficult to scrutinise with any certainty. The Government should provide estimates for the cost to consumers of climate change policies as part of its quarterly energy prices publication and require providers to include a summary of this information on electricity bills.
Industrial energy prices
95.Britain is however at a substantial disadvantage in terms of industrial electricity prices when compared with similar European countries. Figure 5 below shows that electricity prices for energy intensive industries121 in Britain have gone from being amongst the cheapest in EU 15 countries in 2003 to the most expensive today.
Figure 5: UK ranking against EU 15 countries122 where 15 is the most expensive industrial electricity prices for energy-intensive users (including taxes) and 1 is the cheapest, H2 1998 to H1 2016
Source: Source: BEIS, International Industrial Energy Prices (24 November 2016), Tables 5.4.1 to 5.4.4: https://www.gov.uk/government/statistical-data-sets/international-industrial-energy-prices [accessed December 2016]
96.Prices for energy intensive users have increased rapidly since 2011, as shown in Figure 6: prices in the first half of 2016 for the most energy-intensive industries in Britain were 86 per cent above the EU 15 median (labelled as extra-large in Figure 6).
Figure 6: UK industrial electricity prices relative to the median price, including taxes, in the EU 15 countries by size of energy user, H2 2007 to H1 2016
Source: BEIS, International Industrial Energy Prices (24 November 2016), Tables 5.4.1 to 5.4.4: https://www.gov.uk/government/statistical-data-sets/international-industrial-energy-prices [accessed December 2016]
97.We heard evidence that high electricity prices have been a factor in decisions taken to move industrial activity from Britain to other countries. Jeremy Nicholson from the Energy Intensive Users Group said it was “one of the biggest factors” and while not the only consideration, it was increasingly becoming the “dominant” one “particularly for energy-intensive industries that are also worried about their own carbon costs in the long run.”123
98.Richard Warren from EEF, the manufacturers’ organisation, discussed the example of the steel industry:
“The reasons underlying the steel crisis have been well discussed: global overcapacity in steel production and cheaper imports from places such as China. That has affected steel companies across Europe, but one has to ask the question: why has the steel sector in the UK suffered particularly badly? One reason that comes up consistently from steel companies is energy prices and, specifically, electricity prices.”124
99.Depending on the type of furnace, he thought the cost of electricity in the steel industry amounted to between 11 and 20 per cent of overall costs. In written evidence EEF said that these high prices had “undermined the sector’s ability to operate competitively” and “diminished the UK’s attractiveness as a place for inward investment.”125
100.Industrial electricity prices in the UK also compare unfavourably with fellow members of the International Energy Agency: when taxes are included, the UK had the third highest prices in the G7 in 2015 with prices 46 per cent above the EU median.126
The cost of climate change policies
101.In written evidence the Energy Intensive Users Group claimed that “the impact of climate policies, and the extent to which their costs affect industrial supplies, is the single biggest reason for the disparity in EU electricity prices.”127
102.As with domestic bills, we have struggled to find a reliable breakdown for the components of industrial electricity bills. An added complication is that since 2013 the Government has been compensating those energy-intensive industries who are “most exposed to international competition” for the cost of climate change policies.128 The various methods of compensation, as described to us by the department, are set out in Box 5.
Box 5: Government compensation schemes for energy-intensive industries
|
Climate Change Levy: As of 2013/14 the Climate Change Levy discount for sectors with Climate Change Agreements increased to 65 per cent for gas and 90 per cent for electricity. In addition, sites in the mineralogical and metallurgical sectors are fully exempted from the Climate Change Levy. Renewable and low-carbon electricity support programmes: Eligible industries can currently receive compensation for up to 85 per cent of the costs of the Renewables Obligation and Feed-in Tariffs backdated to 14 December 2015. In addition, eligible industries are being exempted from up to 85 per cent of the costs of Contracts for Difference. Carbon costs: Eligible industries can claim compensation for the indirect costs of the EU Emissions Trading Scheme (as of August 2013) and Carbon Price Support (as of April 2014) on their electricity prices. The exact rate of compensation varies by sector, but is currently around 64 per cent on average. |
Source: Written evidence from the Department for Business, Energy and Industrial Strategy (UEM0083)
103.We received some estimates from Mr Nicholson as to the proportion of industrial bills that relate to climate change policies. The Department subsequently took these figures and provided an estimate of the extent to which the compensation schemes offset the cost of those policies. Their analysis, set out in Table 4, found that the schemes reduced the proportion of industrial bills relating to climate change policies from 44 per cent to 13 per cent of the total.
Table 4: Effect of the Government’s compensation scheme on industrial electricity prices in 2016 (analysis carried out by BEIS)
Components of industrial electricity bills |
Mr Nicholson’s figures for costs129 (£/MWh nominal) |
Mr Nicholson’s figures, adjusted by BEIS for compensation measures (£/MWh nominal) |
|
Wholesale energy excluding carbon, network, and metering costs |
50 |
50 |
|
Carbon costs |
13 |
5 |
|
Support for renewables |
20 |
3 |
|
Climate change levy130 |
5.6 |
0 |
|
Total price |
88.6 |
58 |
|
Of which: energy and climate change policies |
38.6 (44%) |
8 (13%) |
Source: Additional written evidence from the Department for Business, Energy and Industrial Strategy (UEM0091)
104.The Committee on Climate Change claimed in a November 2015 paper that when compensation was taken into account, only around one per cent of the blast furnace costs for steel were related to climate change policies. They noted that the global price of steel had fallen by 60 per cent in the preceding four years and sterling had appreciated by 15 per cent in the preceding two years: “Of course, when margins are tight even an impact of the order of 1% might be said to be material, but this is clearly a different order to the impacts deriving from the reduced international price of steel and sterling appreciation.”131
105.When asked about the discrepancy between his figures and those of the Committee on Climate Change, Mr Warren said his figures had been produced in 2016 by steel companies and he would “perhaps question all the figures that come out of the climate change committee on this.”132
The effect of prices on industry
106.Other witnesses thought the claims of industry were exaggerated. The UCL Energy Institute described the “substantial industrial lobbying effort” as “disingenuous”: “There is no overall risk to competitiveness, and moreover, those sectors potentially exposed in practice are largely either exempt from or are compensated for those costs.”133 They cited a 2015 study that had concluded that energy price differences between countries “explain less than 0.01 per cent of the variation in trade flows.”134
107.Mr Nicholson said that like-for-like comparisons with other countries were “not straightforward and I sympathise with the Government in trying to find official international data that make that transparent.”135
108.It is therefore difficult to understand the extent to which industrial activity is affected by climate change policies. The compensation arrangements add further obscurity. With different levels of compensation for different industries, it is perhaps impossible to calculate what the average cost is to industry. The analysis by the Department—based only on figures given to us in oral evidence—is the best estimate we have been provided with.
109.Comparisons with industrial users in other countries are similarly difficult. It is hard to find accurate statistics on industrial energy prices that take full account of the effect of rebates that are offered in countries such as Germany. The Government nevertheless acknowledges that there is a problem: it said in its January 2017 ‘Building our Industrial Strategy’ green paper that “electricity costs have moved out of line with other European countries.”136 A “long-term roadmap to minimise business energy costs” is due to be published later this year.137
110.There is little transparency around the cost of climate change policies for industrial users. The Government should publish what effect the policies have on industrial energy bills—taking into account taxes, industry levies and the operation of the compensation schemes—and on industrial location.
111.The Department’s analysis does highlight that without the compensation schemes, the cost of climate change policies would have been very substantial at around 44 per cent of bills. As the schemes were only introduced in 2013, the compensation may have come too late for some. Many industries—aluminium, chemicals, glass, paper—have already moved plants abroad.138
112.The Secretary of State for Business, Energy and Industrial Strategy told us that he wanted to make the industrial implications of energy policy into a fourth objective:
“In the balance between the three components of the trilemma, we should add a fourth, which is that increasingly we should consider the industrial implications of energy policy, perhaps in a way that has not been considered before, as regards both the cost of energy to industry and the industrial opportunities that arise from decisions we make on energy policy. 139
113.While this will be too late for those industries that have already moved, it would provide assurance that the Government is bearing in mind the effect that climate change policies have on international competitiveness.
114.Comparisons with other countries are difficult but the Government itself has acknowledged that electricity prices for energy intensive industries in the UK are amongst the highest in Europe. The Government has estimated that even with its compensation schemes taken into account, around 13 per cent of industrial electricity bills for energy intensive industries are the result of climate change policies. This is a disincentive for such businesses to remain or to relocate operations to the UK.
115.The move of the energy portfolio to the Department for Business, Energy and Industrial Strategy offers an opportunity to make sure that the costs to business are taken into account when making energy policy. We welcome the Secretary of State’s recent commitment to ensuring electricity is affordable for industry.
66 References to the capacity margin in this report are to the de-rated margin unless otherwise stated.
67 National Grid, Winter Outlook Report 2016/17 (14 October 2016): http://www2.nationalgrid.com/UK/Industry-information/Future-of-Energy/FES/Winter-Outlook/ [accessed January 2017]. This margin is greater than the Grid’s July 2016 prediction of 5.5 per cent. The difference is due partly to lower gas exports via one of the UK’s interconnectors (see Box 4).
68 Ibid.
71 Q 33 (Tony Lodge); see also Tony Lodge, Centre for Policy Studies, The Great Green Hangover (18 November 2015): http://www.cps.org.uk/publications/reports/the-great-green-hangover/ [accessed January 2017]; written evidence from Energy Saving Catapult (UEM0030)
72 National Grid, Winter Review 2016 (26 May 2016): http://media.nationalgrid.com/media/1293/ng-winter-review-2016.pdf: [accessed January 2017]
76 Ibid.; see also written evidence from the UCL Energy Institute and Institute for Sustainable Resources (UEM0064)
78 National Grid, Service Overview, Demand Side Balancing Reserve (2 March 2015): http://www2.nationalgrid.com/UK/Services/Balancing-services/System-security/Contingency-balancing-reserve/ [accessed January 2017]
79 Additional written evidence from National Grid (UEM0095). The Demand Side Balancing Reserve is a (relatively small) part of wider policy of managing demand which is discussed further in paragraph 67.
80 National Grid, letter on ‘Decision on DSBR Procurement’, 22 August 2016: http://www2.nationalgrid.com/UK/Services/Balancing-services/System-security/Contingency-balancing-reserve/DSBR-Tender-Documentation/ [accessed January 2017]
82 National Grid, ‘Demand Side Response: 2017’: http://www2.nationalgrid.com/UK/Services/Balancing-services/Demand-Side-Response/ [accessed January 2017]
83 Letter from Rt Hon Greg Clark to Lord Hollick, 16 January 2017; The total cost of the auctions to date is £1bn.
84 Written evidence from the Institute of Engineering and Technology (UEM0020) and written evidence from Dr John Rhys (UEM0011)
91 The ‘Moyle’ interconnector to Northern Ireland has been operating at half capacity since 2010. The IFA connector to France was damaged during Storm Angus in November.
93 National Infrastructure Commission, Smart Power (March 2016) https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/505218/IC_Energy_Report_web.pdf [accessed January 2017]
94 House of Lords Science and Technology Committee, The Resilience of the Electricity System
95 Ibid.
96 National Grid explained that this “allow[s] the UK to trade efficiently with neighbouring countries without being subject to tariffs”. Additional Written evidence from National Grid (UEM0095)
97 Ibid.
98 Updated using: National Grid, ‘Interconnectors’: http://www2.nationalgrid.com/About-us/European-business-development/Interconnectors/; Ofgem, ‘Electricity Interconnectors’: https://www.ofgem.gov.uk/electricity/transmission-networks/electricity-interconnectors; France-Alderny-Britain, The Project: http://www.fablink.net/; Statnett, ‘North Sea Link’: http://www.statnett.no/en/Projects/Cable-to-the-UK/; Nemo Link, ‘Interconnector Locations’: http://www.nemo-link.com/the-project/locations/; Greenlink Interconnector, ‘The Project’: http://www.greenlinkinterconnector.eu/project; Mutual Energy, ‘Moyle Interconnector’: http://www.mutual-energy.com/electricity-business/moyle-interconnector/history-and-development/ [accessed January 2017]
101 Written evidence from the UCL Energy Institute and Institute for Sustainable Resources (UEM0064); Q 41 (Prof Michael Grubb)
107 The average electricity bill increased from £333 in 2003 to £572 in 2016 (both in 2010 prices). Taken from Figure 1 above.
108 Committee on Climate Change, Energy Prices and Bills, impacts of meeting carbon budgets 2014 (December 2014): https://www.theccc.org.uk/wp-content/uploads/2014/12/Energy-Prices-and-Bills-report-v11-WEB.pdf [accessed January 2017]
109 These figures are taken from data published alongside the report. The report itself only published the breakdown for a combined gas and electricity bill where climate change policies accounted for 4.5 per cent of the total.
110 Competition and Markets Authority, Energy Market Investigation, Final Report (24 June 2016): https://assets.publishing.service.gov.uk/media/5773de34e5274a0da3000113/final-report-energy-market-investigation.pdf [accessed January 2017]
111 Q 12 (Professor Dieter Helm)
112 Emily Gosden, ‘Ofgem warns Big Six firms against raising energy prices’, The Times (20 January 2017): http://www.thetimes.co.uk/edition/business/ofgem-warns-big-six-firms-against-raising-energy-prices-tbxx9j8c3 [accessed February 2017]
113 EDF Energy, ‘EDF Energy cuts variable and prepayment gas prices this winter, variable electricity prices forzen until March’ (16 December 2016): http://media.edfenergy.com/r/1189/edf_energy_cuts_variable_and_prepayment_gas_prices_this [accessed February 2017]. Npower announced in February 2017 that bills on its standard variable tariff would rise by an average of 9.8 per cent a year from March 2017. A statement on their website said this was because “the cost of supplying energy to your home has increased, as well as the amount we need to pay towards government schemes”: npower, ‘Our price increase’: https://www.npower.com/home/electricity-and-gas/price-change/?AG=003&CH=PPC&REF=GOOGB&WT.mc_id=RESPPCGOOGB&WT.srch=1&gclid=CJTagsm5g9ICFeyT7Qodyn8B7Q [accessed February 2017]
114 Q 167 (Greg Clark MP)
115 The other signatories to the letter were Sir Callum McCarthy, former chairman and chief executive of Ofgem and the Gas and Electricity Markets Authority, Eileen Marshall CBE, former managing director of Ofgem, Stephen Smith, former managing director of the markets division at Ofgem and Clare Spottiswoode CBE, former head of the office of Gas Regulation.
117 The Government reclaims the cost of low-carbon generation support by levying electricity suppliers who then pass on those costs to consumers in electricity bills. See Box 2 for further explanation.
118 Medium consumers are defined as having an annual consumption of 2,500 to 4,999 kilowatt hours per year.
119 There was a change in methodology in calculating prices in 2007 which means prices before 2007 are not directly comparable to prices after. But prices as compared to other countries remains comparable before and after 2007.
120 See para 83.
121 Defined as using between 70,000 and 150,000 megawatt hours a year.
122 Excluding Luxembourg.
123 Q 97 (Jeremy Nicholson)
124 Q 97 (Richard Warren)
126 Department for Business, Energy and Industrial Strategy, International industrial energy prices (22 December 2016), Table 5.3.1: https://www.gov.uk/government/statistical-data-sets/international-industrial-energy-prices [accessed February 2017]
127 Written evidence from Energy Intensive Users Group (UEM0051). Mr Nicholson also told us that “virtually all the increase in costs is attributable to climate policy”. (Q 97)
129 As provided to the Committee in oral evidence and reproduced by the Department for Business, Energy and Industrial Strategy in written evidence.
130 Mr Nicholson did not provide a figure for the climate change levy but the Department for Business, Energy and Industrial Strategy added it on.
131 Committee on Climate Change, Technical note: low-carbon policy costs and the competitiveness of UK steel production (November 2015): https://www.theccc.org.uk/publication/technical-note-low-carbon-policy-costs-and-the-competitiveness-of-uk-steel-production/ [accessed January 2017]
132 Q 97 (Richard Warren)
133 Written evidence from the UCL Energy Institute and Institute for Sustainable Energy Resources (UEM0064)
134 Ibid.
135 Q 100 (Jeremy Nicholson)
136 HM Government, Building our Industrial Strategy (January 2017): https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/586626/building-our-industrial-strategy-green-paper.pdf [accessed February 2017]
137 Ibid.
139 Q 158 (Greg Clark MP)