Exploring the fairness of energy policy

Are policy costs driving up consumers’ energy bills?

Project duration: January 2012 to June 2012

In 2012, CSE worked with the Association for the Conservation of Energy to produce two reports for Consumer Focus as part of their ‘Who Pays?’ programme. The reports address:

  1. The impact of future energy policy on consumer bills
  2. Past and future trends in environmental and social levies

Consumer Focus’s ‘Who Pays?’ programme details energy customers’ historic and future financial contributions to energy policy goals and their views about having to make these contributions.

1. Impact of energy policy on consumer bills

What is causing energy bills to rise?

With energy prices rising, fuel poverty becoming more widespread, and households struggling to afford their energy bills, some have sought to focus the blame on the impact of energy and climate change policies that often result in a direct or indirect levy upon energy bills. Government and the Committee on Climate Change have responded by publishing assessments of the impacts that policies currently have on energy bills, and the likely impacts by 2020.

This study reviewed these reports and produced an independent set of assumptions. Six scenarios were used to explore the changes to energy bills through to 2020, combining three ‘fuel price’ scenarios (made up of wholesale, network, metering and other non-policy costs met by suppliers) with two ‘policy mix’ scenarios i.e. low and high impact.

Figure 1 - Mean total energy bill in 2020 for the ‘winners’ and ‘losers’ by scenario

Conclusions

  • Across all of our scenarios and across fuel types, the factor most likely to determine the average fuel bills in 2020 will be the costs of wholesale energy (fossil fuel prices) and the networks. It is not true to say that policy costs are driving the cost of energy bills.
  • In our scenarios, energy bills in 2020 are never both higher than in 2011 and higher than if the Government adopted a ‘do-nothing’ approach, abandoning all energy and climate policies this year. Overall the research finds the Government’s policy mix is an effective insurance against rising fossil fuel prices for the average customer.
  • Policy costs are levied far more greatly onto electricity bills than onto gas bills.  This puts pressure on those heating with electricity, and requires an ambitious and successful products policy in order to help mitigate the impact of the higher prices.
  • Additional assistance must therefore be aimed at supporting those heating with electricity, who are more likely to be low income and in fuel poverty. Whilst the electrification of heat is a long term aim of Government, the increases in electricity costs and the inefficiency of most existing systems puts these households at real risk of energy affordability.

CSE’s CEO Simon Roberts said: “It’s really important to get this level of granularity in the analysis of distributional impacts to understand who pays and who benefits. The issue of affordability picks up on some of our recent work for Ofgem where we identified a group of low income high consumers who use electricity for heating.”

Download the full report here.


2. Environmental and social levies: past, present and future

Are consumers’ bills paying for environmental policies?

The principle of recovering the costs associated with UK environmental and social policies via consumer energy bills or taxes is not a new one. This study aimed to calculate the likely average cost per household associated with such policies from 1990 to 2020.

How much have consumers paid, and what for?

In 1990, just one environmental energy policy – the Non-Fossil Fuel Obligation (NFFO) – imposed a cost of around £52 per year on the average household energy bill. This cost on energy bills remained relatively constant between 1990 and 2000.

In 2001, the cost of supporting nuclear power and decommissioning was moved to the public finances, to be recovered via taxation. Consequently, the amount contributed to policies via energy bills fell to an all-time low of £1 per year.

From 1990 to 2020, the cost to households of supporting nuclear power falls sharply, from around £86 per household in 2010 to an expected £14 in 2020 (taken from tax). The average annual cost of the Renewables Obligation rises from £19 in 2010 to an expected £37 in 2020.  The EU Emissions Trading System sees a similar scale of increase, from around £22 to £27. The cost of supporting energy efficiency measures remains relatively constant at an average of around £29 per household.

The cumulative cost to taxpayers and energy customers of delivering a low carbon energy policy in the UK from 1990 to 2010, and projected costs from 2011 to 2020, are illustrated in Figure 1 and Figure 2.

Figure 1. Total cumulative cost in £billion of environmental and social levies to taxpayers and domestic energy customers from 1990 to 2010

Figure 2. Projected total cumulative cost in £billion of environmental and social levies to taxpayers and domestic energy customers from 2011 to 2020 (under DECC’s ‘Option A’ scenario for FIT)

CSE’s Ian Preston said: “Despite press coverage of the cost of environmental policies and the more recent energy supplier rhetoric that seeks to blame price rises on policy costs, it’s interesting to see how long we have been paying for these measures and the extensive use of taxpayers’ money which often goes un-noticed.”

Download the full report here.

For further information contact:

Ian Preston | 0117 934 1422

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