The impact of low-carbon policies on energy affordability is much discussed at the moment. In order that discussion remains fact based, we thought it appropriate to repeat some of the key findings from our energy prices and bills reports. This note also includes a new estimate that 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 in recent years 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.
- Annual energy bills for the typical dual fuel household (i.e. a household using gas for heating and electricity for lights and appliances) increased by £520 between 2004 and 2012, from £610 to £1,130.
- The vast majority of this increase is due to changes in the international price of gas.
- Around £30 of the increase is due to policies which support investment in low-carbon technologies, with a £45 increase due to support for investment in energy efficiency improvement, which improves energy affordability for vulnerable consumers.
- Whatever the overall bill increase in the year ahead, low-carbon policies will contribute around £10 for the typical household. See below for details.
- 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.
Investment in low-carbon power generation technologies over the next two decades is a strategy which offers significant benefits (e.g. £50-100 billion) compared to the alternative of focusing on investment in conventional gas-fired generation.
This reflects the expectation that carbon prices will have to rise in a carbon-constrained world, increasing the cost of gas generation; that gas prices may rise; and that there is a benefit from investing in less mature technologies and driving down their costs before rolling them out at larger scale.
Further benefits may ensue from increased energy sovereignty associated with low-carbon power generation rather than importing energy from countries where there may be a high degree of geopolitical risk.
Early power sector decarbonisation only becomes costly with a combination of gas prices much below current levels and a significant departure from the currently agreed UN and EU climate objective, such that carbon prices are well below the Government’s central scenario.
Detailed note on 2013/14 energy bill impacts due to low-carbon policies
The increase in bills due to low-carbon policies comprises: costs related to support for investment in low-carbon technologies funded under the Renewables Obligation (RO) and Feed-in Tariffs (FITs); increase in the carbon price underpin; increase in Energy Company Obligation (ECO) costs.
Increased funding under the RO and FITs.
- The bill increase due to new investment reflects costs due to investment coming on the system through 2013 (1.8 GW onshore wind, 1 GW offshore wind, 0.2 GW solar), and projected costs due to investment coming on the system in 2014 (0.5 GW onshore wind, 0.2 GW offshore wind, 0.15 GW solar). Assuming a smooth profile of investment in 2013 and 2014, and based on current ROC multiples and prices / FITs, this would add around £3-4 to the annual bill for a typical dual-fuel household.
- In addition, a further 80p would have to be added to reflect index linking of support for historical investment.
- Higher increases would be required for households with electric heating, given that additional costs would fall disproportionately on this group.
- The carbon price underpin will increase from £4.94/tCO2 (equivalent to 0.09 p/kWh) in 2013/14 to £9.55/tCO2 (equivalent to 0.18 p/kWh) in 2014/15. This would add around £4.50 to the typical household bill.
- Increased ECO funding. The Government has committed to keep ECO funding costs constant in real terms at £1.5 billion annually. Uplifting this amount for inflation of 2.6% implies the need to increase typical household energy bills by around £1.50, with further increases if ECO costs were to escalate in real terms.
Therefore funding under the RO/FITs and the carbon price underpin would add £5-10 to the typical household bill from 2013 to 2014, with a further £1.50 due to increased ECO costs. Together these would increase the bill for the typical household by around 1%. Recent announcements of much larger increases are therefore dominated by other factors, unrelated to low-carbon policy.