Energy Bill will impose immense costs on households and businesses

Today’s agreement on energy policy, ahead of the forthcoming introduction of the Energy Bill, shows the government remains committed to meeting ambitious targets on greenhouse gas emissions and renewable energy. The economic cost will be immense. The Department of Energy and Climate Change quotes a figure of £110 billion of investment in the electricity sector alone (by 2020), a high proportion of which will be used to expand offshore wind capacity and connect it to the national grid. This investment will be funded by higher bills.

A number of questionable claims are made to justify the policy. Firstly, it is claimed that new investment is required to ‘keep the lights on’ since a significant proportion of coal-fired power stations will close within the next few years.  In fact, environmental policies – in particular the EU Large Combustion Plant Directive (LCPD), which is supported by the UK government – are forcing the closure of coal-fired power stations which are not fitted with desulphurisation plants. In other words, the potential reduction in generating capacity is itself largely the result of environmental regulation.

Then there is the claim that meeting the targets on emissions and renewable will add only a small amount to bills. In reality, these policies are already inflating electricity prices by a very large degree. This is because government regulation effectively forces power companies to generate electricity from high cost sources and limits the extent to which they can deploy low-cost sources such as coal. The Renewables Obligation and feed-in-tariffs are two ways in the electricity market is rigged to achieve this result. And as long ago as the 1990s the ‘dash for gas’ was partly spurred by the imposition of EU regulations on coal-fired generation. It is telling that in US states that have refused to adopt European-style green policies, electricity prices are now over 50 per cent lower than in the UK. Indeed, DECC itself has estimated that by 2015, climate change policies will be adding 26 per cent to domestic electricity prices and 10 per cent to domestic gas prices. The impact on commercial users will be similar. This estimate implies an extra burden on energy consumers of approximately £12 billion per annum. Other environmental policies such as the LCPD will push up prices even further.  Moreover, there will be additional negative effects on the wider economy. For example, rising energy costs are likely to add to the political pressure to raise welfare benefits for those on low incomes, who spend a disproportionate share of their income on utility bills.

Despite the huge costs being imposed within the UK, these policies are unlikely to make a discernible difference to climate change. Firstly, Britain accounts for only a tiny fraction of global greenhouse gas emissions. Moreover, developing countries are rapidly increasing their carbon output. Secondly, higher energy costs in the UK are likely to displace economic activity, particularly energy intensive industries, to countries with lower costs such as China, a process known as ‘carbon leakage’. If production is less energy efficient in developing countries, as is often the case, this may actually lead to a rise in emissions. Given their questionable overall effectiveness, there is surely a strong case for the British government to moderate its green energy policies to take greater account of their impact on households and businesses. At the very least, the government should ensure that targets are met at the lowest possible cost by reforming fiscal and regulatory frameworks so that they treat different sources of emissions similarly.

Richard Wellings was formerly Deputy Research Director at the Institute of Economic Affairs. He was educated at Oxford and the London School of Economics, completing a PhD on transport and environmental policy at the latter in 2004. He joined the Institute in 2006 as Deputy Editorial Director. Richard is the author, co-author or editor of several papers, books and reports, including Towards Better Transport (Policy Exchange, 2008), A Beginner’s Guide to Liberty (Adam Smith Institute, 2009), High Speed 2: The Next Government Project Disaster? (IEA , 2011) and Which Road Ahead - Government or Market? (IEA, 2012). He is a Senior Fellow of the Cobden Centre and the Economic Policy Centre.

2 thoughts on “Energy Bill will impose immense costs on households and businesses”

  1. Posted 24/11/2012 at 14:36 | Permalink

    Where did these so-called energy ‘targets’ come from? And do they make sense? What is the cost of renewables, as compared to fossil fuels? If, as I suspect, the cost of renewables is much higher, does it make economic sense to go for renewables rather than fossil fuels? Spending huge amounts now on the off-chance that they might help mitigate relatively small costs in the distant future seems crazy.

  2. Posted 26/11/2012 at 10:47 | Permalink

    The targets are largely self-inflicted by previous UK governments, albeit within a broader EU policy framework. Perhaps the target that makes least sense is the requirement to generate 15 per cent of energy from renewables by 2020. Since this applies to the whole energy sector, including domestic heating and transport, where introducing renewables is difficult, it implies raising the renewable share of electricity generation to around 30 per cent – hence the massive investment programme in wind power. Without this renewables goal, meeting the target on greenhouse gas emissions would have been much more affordable.

    It is difficult to obtain honest figures about the relative costs of different generation methods, but offshore wind is probably several times more expensive than coal and also requires back-up capacity.

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