This blog compares our analysis of energy bill impacts due to low-carbon polices with a campaign launched recently by the TaxPayers’ Alliance (TPA) that draws on analysis by Peter Atherton at Liberum Capital. It shows that the TPA campaign and the analysis upon which it is based provide vastly exaggerated impacts of likely energy bill impacts, and cannot be reconciled with the facts on low-carbon technology costs. Plausible estimates based on the best available evidence suggest significant benefits and limited costs of investment in a portfolio of low-carbon technologies over the next decades.
Our analysis suggests that investment in a portfolio of low-carbon technologies offers lifetime cost savings of £25-45 billion with gas prices at around current levels, rising to over £100 billion with high gas and carbon prices.
In order to secure these benefits, which occur in the period to 2050, investment costs will add around 10% to the annual energy bill for a typical household in 2020, with around a further 5% increase through the 2020s; there is scope to offset these impacts through energy efficiency improvement.
- The average energy bill in 2012 was around £1,200 for a dual-fuel household using gas for heating and cooking (costing around £700) and electricity to power lights and appliances (around £500). In 2011 (a warmer year), the average bill was around £1,000.
- Our analysis suggests that the impact of policies to support investment in low-carbon generation, and to which the Government is already committed, will add around £100 to the energy bill of the typical household in 2020. This will be reflected in higher electricity bills, with no increase expected in gas bills.
- The Government’s carbon price underpin will add around £50 to the typical household bill in 2030 compared to 2020.
- We estimate that a further £20 per household will be required in 2030 to support portfolio investment.
- The energy efficiency opportunity from boiler replacement, insulation measures and efficient appliances is worth around £145 per household in 2020, with more savings potentially available in the 2020s.
The detailed calculations for these numbers are fully transparent (see our 2012 Bills and 2013 EMR reports). The 2020 numbers are uncontroversial, and can be easily calculated from the Government’s agreed limit on the levy control framework. The 2030 numbers require assumptions on costs of low-carbon technologies to 2030, which are made on the best evidence available.
The TaxPayers’ Alliance (TPA) campaign suggests that impacts of low-carbon policies would lead to energy bills that are considerably higher in 2020. This is because they include inflation in their cost estimates, assume impacts on the gas bill from policies that neither currently exist nor are being considered, and start from a very high consumption base.
- The TPA assume a 29% increase in energy bills to 2020, reflecting equivalent increases in both electricity and gas bills.
- The increase in electricity bills is higher than our assessment. While it is not clear exactly why this is the case, at least part of the difference appears to be due to assumed inflation. This is not relevant in economic analysis of policy impacts, which is always assessed in terms of real rather than nominal prices.
- Moreover, the TPA also assume a 29% increase in gas prices based on an argument that the Government will have to increase gas prices in order to maintain a level playing field between gas and electricity. However, there is absolutely no intention to introduce low-carbon policies which would increase the gas price.
- Finally, the TPA report headline figures based on a current bill of around £1,500 (rather than £1,200 or £1,000), which exaggerates the future bill and the impact of low-carbon policies for the average household.
Looking out to 2030, the TPA campaign and the analysis by Peter Atherton of Liberum Capital upon which it is based assume bill impacts which are orders of magnitude higher than our analysis suggests. It is not clear exactly why this is the case, given a lack of detail to support the high-level TPA / Liberum numbers. However, it appears to be a combination of including inflation in cost estimates and assuming equivalent impacts on gas bills, assuming very limited cost reduction due to investment in low-carbon technologies, using very high estimates of infrastructure investment costs, and comparing to very low estimates of electricity prices for a gas-based energy system.
- As for the 2020 bill impacts, the 2030 impacts appear to include inflation (as above, this is not relevant in economic analysis of bill impacts, but the impact when looking 18 years ahead is large). Again, impacts on electricity bills are assumed to be matched on gas bills, despite no intentions from Government to introduce low-carbon policies that would increase gas bills.
- Although specific cost assumptions are not set out, the TPA / Liberum impacts imply an assumption of very limited reduction in the cost of low-carbon technologies. This goes against a vast evidence base which shows that technology costs fall through investment and learning by doing.
- The TPA / Liberum numbers attribute huge infrastructure investment costs to low-carbon policies without a clear basis (e.g. an annual cost of £4 billion in 2030 for strengthening the electricity distribution network is assumed, despite the expectation that electric vehicles charged overnight will not require material network strengthening).
- Very high estimates of subsidy required to support investment in low-carbon technologies are derived against a very low electricity price for a gas-based system. This price would not support investment in gas-fired generation and, if it were to prevail without accompanying low-carbon investments, would result in security of supply problems.
If Liberum and the TaxPayers’ Alliance were correct and low-carbon generation was many times more expensive than expected, then we would agree with the conclusions, that a slower pace of investment would be appropriate.
But the TPA / Liberum estimates go far beyond the worst of all worlds for investment in low-carbon technologies, and cannot be reconciled with the evidence and facts on the costs of low-carbon power generation
Our analysis, which draws on the best evidence available, clearly shows that the costs of decarbonisation are relatively small and the benefits are large.
Given that this is the case, the Government should confidently commit to invest in low-carbon technologies over the next two decades. This should be subject to the caveat that costs must fall in order for investment to continue, which acts as a failsafe to ensure that consumers only continue to pay where this is of clear benefit.
Such sensibly designed policy will provide the right signal for investment in supply chains and project development. It will put us on the path to building a resilient energy system, and providing insurance against risks of high energy bills and dangerous climate change.