UK Energy Costs

A regular claim made by those who are skeptical of climate change is that green subsidies are increasing energy bills and driving people into fuel poverty. I came across the figure below which indicates that energy, climate change & social policies are adding £112 to the average bill (9%). If, however, you break it down (as the figure does) £47 is energy saving costs for low-income homes and £11 is the warm home discount for pensioners. These both seem like perfectly reasonable things to be providing (help for those on low-incomes and pensioners). There are a few other costs, that aren’t labelled, but if everything else is associated with renewables, it’s now only 4.3% directly associated with subsidising renewables. The figure also claims that without these green measures, the average bill in 2020 would be £166 higher than it will be with the green measures.

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The reason I thought I would write about this is that I also heard Ed Davey, the Secretary of State for Energy and Climate Change, on the radio today. What he said seemed entirely consistent with what the above figure suggests. He also indicated that the main reason for the rise in energy bills is that the cost of natural gas has risen by 50% in the last 5 years. Furthermore, energy company profits have increased from £2 billion a few years ago, to around £3.5 billion now. Given that the UK has around 15 million households, this is around £233 per household and very close to the other supplier costs and margins category, in the figure above [Correction : The profit I quote here includes all their business and is not just from household energy supply. I believe it is true that their profits have increased from around £2 billion to around £3.5 billion in 5 years, but the profit on each household bill is about £53 - which it turns out has increased from £30 in 2011.]

So, as far as I can tell those complaining about green subsidies are essentially arguing for less help for those on low-incomes and for pensioners and are, somewhat conveniently, ignoring that the main reason from the recent rises in energy prices in the UK is that the cost of natural gas has increased by 50% in the last 5 years, and – over about the same time period – profits have increased by more than 50%. I think that rising energy costs are indeed a worry and something that we should be trying to do something about. However, claiming that it is all due to green policies appears to be wrong and there is evidence to suggest that these green policies will actually lead to reduced energy bills in the medium-term. In my opinion, this is an important issue and we should at least be willing to be honest about what is driving up energy prices and also be realistic about what we can do to prevent energy bills from rising higher than is necessary.

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53 Responses to UK Energy Costs

  1. BBD says:

    Well said!

    The meme that “green subsidies = energy poverty (kills the poor!)” is a typical “sceptical” reality inversion.

  2. verytallguy says:

    It would be informative to add the externalities associated with the various numbers to an alternative picture.

    The “green subsidies” would, I think have a negative externality associated (reduced future costs), probably making it net well below zero, whereas the wholesale energy would have a large positive externality – future damage from warming.

  3. Indeed, but I suspect the issue is convincing people of the “truth” of those externalities. If people believe that climate change isn’t real, then they won’t accept the positive externality associated with fossil fuels. At least the breakdown of costs in this table appears to be largely irrefutable, so people should (one would hope) be able to accept that the green subsidies are not the major reason for the rise in energy prices.

  4. verytallguy says:

    I’m not so sure I agree at all. I think this formulation allows the issue to be framed as green costs. The debate is then about how to reduce these “costs”

    Whereas the truth is that fossil fuels are actually far more expensive, it’s just that these costs are not visible. Framing the debate around the costs of fossil fuels is IMHO where we need to get to.

    George Osborne would very happily remove the efficiency levy, thereby claiming to reduce tax and at the same time increasing immediate costs for the poorest and long term costs for all of us.

  5. Maybe I misunderstand. So, I completely agree that these externalities are likely correct and that fossil fuels will indeed become more expensive. I was simply suggesting that convincing people of this might be difficult given how the media (or certain parts of the media) will likely claim that the calculations are wrong. My understanding is that these costs need to be determined using models and so one could imagine the Telegraph rolling out some high-profile economist who would claim that the calculations were all wrong and that switching to renewables would lead to the destruction of our economy. I guess that doesn’t mean that it shouldn’t be done but I was simply suggesting that the table here, alone, shows that the green agenda is not the main reason for rising energy bills.

  6. verytallguy says:

    I agree with you on your rational analysis.

    But beware, this is I think a clear and concerted effort to allow a political victory for consumers to be trumpeted by removing these “costs”.

    It doesn’t matter that they are small, it is symbolic. For “sceptic” politicians to throw red meat to their supporters and at the same time claim to be on the side of consumers. They care not at all for either carbon emissions or insulting the homes of the poorest.

    Osborne and the power companies are both focussing on this. Watch it coming. I predict the Mail headline “George’s £112 lifeline to rescue us from the greens”

  7. verytallguy says:

    Ah. I see idunno below has already, depressingly, proved me correct.
    ” by far the greater part of the damage … is the result of green levies “

  8. I completely agree that it is going to happen (and is already happening). So maybe this illustrates my naivety. I assumed that noone could conclude – given this information – that a major part of the rise in energy costs was due to green policies. I, of course, forgot about Delingpole.

  9. Yup. Amazing how he continues to get away with, what appear to be, complete fabrications.

  10. BBD says:

    Wotts, the GWPF has been pumping this meme into the DM for at least two years.

    Most of these bright ideas are traceable back to the GWPF.

  11. I think you have more data on this than I have, but it does seem to indeed be true. Fairly easy, as far as I can tell, to track these ideas back to the GWPF.

  12. BBD says:

    Re: GWPF, Daily Mail and evil green taxes meme, I think this is the start of it. The Carbon Brief has provided really outstanding monitoring of the shenanigans right from the outset.

  13. Rachel says:

    I just couldn’t stop myself from clicking that link. I know I always get cross when I read James Delingpole but I still can’t stop myself. It’s some strange form of self-punishment.

  14. BBD says:

    Did I mention war on democracy once? And was I gently mocked?
    ;-)

  15. BBD says:

    What Joseph Conrad called “the fascination of the abomination” in Heart of Darkness.

  16. I try to avoid suggesting conspiracies, but – as I think I mentioned in an earlier post – I’ve just finished reading Stiglitz’s new book and it’s hard to conclude that there isn’t some kind of war on democracy. It might not technically be a conspiracy as it appears to be happening right in front of our eyes and most are simply ignoring it. Maybe it’s an example of people’s ability to block out things that just seem too incredible to actually be true.

  17. Rachel says:

    Yes, that’s probably about right.

  18. BBD says:

    It’s not a conspiracy, Wotts. It’s business as usual.

  19. BBD says:

    You sure? I thought I might have been a bit wishy-washy liberal about this.

  20. Rachel says:

    Well I did have to go and look up “abomination” and it’s defined as a “a thing that causes disgust or hatred” and this describes JD perfectly! So, yep, pretty sure. Unless you have just made a joke which I don’t get.

  21. Just because you want to subsidise fuel bills for some of the population, its not clear you should be doing that by adding to other’s fuel bills. General taxation is another, perhaps better method.

    Also,

    > The figure also claims that without these green measures, the average bill in 2020 would be £166 higher than it will be with the green measures

    Yes it does make that claim. But it provides nothing to support it, and its not obviously plausible. Without some evidence I wouldn’t believe it.

  22. BBD says:

    It was a feeble attempt at humour.

  23. Yes, I agree. It would probably be better to simply use general taxation to fund support for those on low-incomes and for pensioners. That doesn’t, though, change that the actual cost of what might be regarded as actual green policies (feed-in tariffs, renewables obligations, etc) is lower than many suggest.

    I also agree that without evidence one shouldn’t necessarily accept the claim that costs will be lower in future with the green tariffs than without. I have some memory of seeing something about this before but can’t remember where. It may, of course, also have been something similar – a claim without any actual evidence.

  24. Rachel says:

    :-D

    It’s not always clear to me which side of politics the word “liberal” refers to because in Australia, the Liberal party is right-wing. I suppose if I see a capital L, it’s right-wing but a small l is left wing.

  25. andrew adams says:

    As Delingpole’s nonsense has been brought to our attention, here’s another piece which equally manages to keep things in proportion.

    “Some 7,800 people die during winter because they can’t afford to heat their homes properly, says fuel poverty expert Professor Christine Liddell of the University of Ulster. That works out at 65 deaths a day. “

    Hitler managed to kill 65,000 civilians in the UK during World War 2, an average of about 12,000 tragic deaths annually for each of the five and a half years of the war. So, ConLibLab’s expensive energy policies are killing us at 2/3rds the rate Hitler managed.

    http://bishophill.squarespace.com/blog/2013/10/10/the-cost-of-climate.html

    Now I’m not normally one to rush to the defence of our government, especially when it comes to the effect of its policies on the poorest in our society, but apart from the fact Wotts has already pointed out that “green” policies only account for a small proportion of recent price rises it’s also worth pointing out that energy poverty and excess winter deaths are hardly a new phenomenon in this country that has suddenly appeared since the introduction of “green” energy policies. What’s more people’s ability to pay their fuel bills is affected by numerous other factors which impact on their economic circumstances. Some of these factors may well be attributable to government policy but to blame these deaths on green energy policies is highly dubious at best, bringing Hitler into it just takes the argument into shark-jumping territory.

    And this was posted on the blog of someone who is portrayed by some as the “respectable” face of AGW sketicism. Some have defended the good Bishop on the grounds that he didn’t actually write it himself (this is known as the “Curry defence”) but he made the decision to post it so he has to take responsibility.

  26. BBD says:

    Ah. I’m sorry Rachel. I didn’t think about that. Typical parochial Brit mentality.
    ;-)

  27. BBD says:

    Well there’s a splendid “sceptic” twofer: reality inversion and Godwin. The Sticky Bishop is showing his true colours.

  28. Yes, I agree. How can someone portrayed as the “respectable” face of AGW skepticism post that without any sense of irony. I see some have tried to add more balance to the claims in the comments, but not very many sadly.

  29. Tom Curtis says:

    Rachel, the liberal philosophy, as in the political philosophy of John Stuart Mill as espoused in his book “On Liberty”, and later taken up by other philosophers including Hayek, is decidedly a right wing philosophy. Confusing matters, “new liberalism” (or “social liberalism”) as espoused by Hobhouse and Rawls is centrist, perhaps shading into left wing in the extremes. US linguistic usage is no guide in this respect. A rather extreme right wing element in the US has largely captured the language, and use “liberal” equivocally. In their usage, and defined by extension, it includes all groups to the left of the Republican party; but defined by intension, they make “liberal” and “socialist” close synonyms. In practice the definition is inconsistent, but is used rhetorically as a club to restrict political thought, ie, it has become an Orwellian term.

  30. Tom Curtis says:

    Wotts, you are in general, a very agreeable person, but I am going to put you on the spot by disagreeing (probably) with Connolley, and suggesting that paying for energy subsidies for the poor should be explicitly placed on bills. The effect of paying for energy subsidies from general revenue is to reduce the cost of energy relative to other goods and services, thereby increasing the use of energy, specifically fossil fuels. In contrast, by forcing the cost to be paid for by energy companies (and therefore passed on to energy bills) the net cost of energy is not increased. As a result the increased usage by the poor will be in part matched by a reduced usage by everyone else.

    Further, I don’t know what the “it” is that provides no support for the claim of higher bills without green energy investments, but the Guardian article containing the figure above links to another article citing a source for the claim, which is then easily found by google, complete with full report, xl spread sheet and supplementary information. In essence the saving is from reduced exposure to projected increases in the wholesale cost of natural gas. Very implausible I’m sure.

  31. Tom Curtis says:

    What is missing from that account is acknowledgement that the warm home discount for pensioners reduces the energy cost for pensioners by 135 pounds per annum, ie, more than the increase in the energy cost for the “average household”. In fact, the suite of policies is saving pensioners 23 pounds per annum. I assume pensioners will also use less energy than the average household to begin with (on the basis of having fewer household members), so the relative saving is even greater.

  32. idunno says:

    Sorry, Wotts, somebody using the same username as me may have used the information in this article to leave an hostile comment on his Grace the Bishop’s blog.

    It is entirely possible that I have not covered my tracks sufficiently, in which case,prepare to receive incoming, from the zombie apocalypse, for which I apologise.

    (But, at time of writing, it’s just shut them up completely) I’m at comment 72, and 73 has yet to appear. And hopefully the mob is headed off towards the DECC website.

    Phew? We happy phew?

  33. Tom, let me partly agree and partly disagree. I think that if we as a society decide that we should support those on low-income and pensioners, then paying for this through higher energy bills is regressive. Although the wealthy will probably have higher energy bills than those on lower incomes, this will not be in proportion to their incomes. Therefore those on higher incomes are contribution a smaller fraction of their incomes towards this social good than those on lower incomes and it’s not clear to me why we shouldn’t see this as a social good (paid for through taxation) than something directly associated with energy bills. However, I can see that you say will have impact. One could argue that a more honest approach would be to pay for social goods through taxation, but introduce carbon taxes that would set energy bills at the kind of level that would encourage reduced use of energy (or at least that associated with fossil fuels).

    As far as the evidence is concerned, I agree. I realised after responding to William that I had written a post about this topic a few months ago and quoted an report that says

    DECC says that thanks to its policies the average domestic bill in the year 2020 would be £94 lower than it would otherwise be (in real terms) – see chart 6.

    So, that’s a bit lower than in the figure above, but at least there are studies that do indicate that these policies will lead to lower energy bills in 2020.

  34. I wouldn’t worry too much. I sent Andrew Montford a tweet asking if he stood by that post. He’s chosen, so far, to ignore my question too.

  35. Rachel says:

    Thanks, Tom. It’s even more confusing than I thought!

  36. Tom Curtis says:

    Wotts, there is no need for a fee on energy bills to cover social goods to have a flat rate. The fee could be set at a rate that rises rapidly as domestic energy usage rises above 1 standard deviation above the median (or modal) usage, for example. You could also set the fee to fall rapidly below 1 standard deviation below median (or modal) usage, with a flat rate within one standard deviation of median (or modal) usage. In doing so you would make the fee progressive, and more effective in limiting CO2 emissions. Arguably such a system would effect greater reductions in CO2 emissions while limiting the harm of cost of energy increases to the poor.

    Alternatively, you can keep the flat rate fee on energy usage, and make the tax system slightly more progressive to compensate. Indeed, for all I know, that is what has been done in the UK (though given the political position of recent parties of government, I doubt it).

    In any event, the simple dichotomy between non-progressive fees on goods and progressive income taxes need not hold in general, and consequently is not a relevant argument. If there is a valid argument for doing it the other way, it is likely to relate to compliance costs; but I doubt differences in compliance costs between the alternate systems are sufficient to be decisive.

  37. Tom, yes that’s a good point and – to be honest – I hadn’t considered that. I agree that there are many ways in which one could provide these services so as to ensure that the costs were progressive. So, I agree that one doesn’t need to think only in terms of taxation being progressive and fees on good being non-progressive. Sadly, I think our current crop of political leaders have not given this much consideration.

  38. Tom Curtis says:

    I assume there is a “don’t” missing from your last sentence.

  39. Yes, there was a missing “not”. Thanks :-)

  40. idunno says:

    More hysterical foaming gibbberish here:

    http://www.dailymail.co.uk/news/article-2456760/Red-Eds-great-green-obsession–real-reason-YOUR-gone-roof-The-hidden-subsidies-household-pays-year-thanks-Milibands-laws.html

    Don’t worry, Wotts, I haven’t had an inocculation, so I’m going nowhere near the comments on that one

  41. > DECC says that thanks to its policies the average domestic bill in the year 2020 would be £94 lower than it would otherwise be (in real terms) – see chart 6.

    Thanks for the link. Its instructive. If you look at fig 6, you find that the bulk of the decreases are from “products policy” of which the report says “refers to the implementation in the UK of EU minimum standards for energy efficiency, and requirements on labelling, for electrical applicances. There are no ‘costs’ on bills associated with this policy”. That’s about £160’s worth – possibly £166, hard to be sure. Also instructive is the preceeding sentence “Largely, policies that incentivise low-carbon energy generation increase bills; the main things that decrease bills are those that encourage or enable using energy more efficiently”.

    So no: you can’t claim that the money being “invested” now in “green energy” is reducing bills later; the saving later are from a different class entirely.

    > easily found by google, complete with full report

    I can’t find the £166 in there either (can you?). No, I don’t want to wade through xl.

    Also, note that there is some madness in that report. Under “Helping people
    save energy” we have “Warm Homes Discount (WHD) Provides winter rebates for pensioners and other vulnerable groups on their energy bill. Began April 2011. ”

    WTF? Since when does providing rebates on energy bills help people save energy? It does the reverse.

  42. Okay, yes I agree that the savings in then DECC report are not a direct consequence of the policies that incentivise a low-carbon economy but are related to using energy more efficiently. There is, however, this report – the provenance of which I don’t know – but that claims

    In an alternative scenario with investment focused on unabated gas-fired generation, there is a risk of much higher cost increases in the long term (e.g. the average annual household bill in a gas-based system could be as much as £600 higher in 2050 than in a low-carbon system if gas and carbon prices turn out to be high).

    So I do think there is evidence that moving to a low-carbon economy can lead to reduced energy bills. To be fair, though, this is not a subject about which I have much knowledge so am never quite sure how much credence to give some of these reports.

  43. I agree, in the long term, that fossil fuel prices are going to go up, most likely (I still disagree that the govt’s response is correct; I’d rather see simple carbon taxes; but I’ve been banging on about that for ages :-)

  44. Vinny Burgoo says:

    Wotts, £94 was DECC’s 2011 estimate. It upped this to £166 in March. Most of the change came from including bill reductions resulting from building regs on gas boiler efficiency: ~£80 pa. As with the other efficiency savings, the cost of implementation wasn’t included (that is, no allowance for the expense of buying fancier replacement boilers).

    2011 calculation:

    2013:

    Note that 2011 included a cost for Products Policy (EU regs on electric goods). Dunno why they got rid of it. Consistency, I suppose.

    Full 2013 report here:

    https://www.gov.uk/government/publications/estimated-impacts-of-energy-and-climate-change-policies-on-energy-prices-and-bills

    Re the Warm Homes Discount, a far simpler way to help poorer people would be to make all electricity contracts twin-tariff and have the first tariff lower than the second. Suppliers say they don’t want to do this because doing it the other way around makes it easier for them to cover their fixed costs but that sounds like bunkum.

    Re CCC’s £600 cost of sticking with gas, it has nothing to do with the costs of extraction and distribution. It all comes from a very high projection of the carbon price in 2050: £500/tCO2. It’s hooey, really. Renewables are better than gas because something imposed to make them better than gas says they are better than gas, and this big number we just made up proves it.

  45. Thanks, I was unaware of the change in the calculation. Yes, what you say about a twin tariff makes sense if one assumes (probably correctly) that those on low-incomes and pensioners will use less energy than those on high-incomes. I think this is similar to what Tom Curtis was suggesting above. I’ll have to read up a bit more on the £600 claim. You may well be right. However, it would surprise me if we didn’t see rises in fossil fuel costs in the coming decades even without a carbon tax.

  46. Just a quick additional comment. The report I linked to in a comment above does say (in relation to the £600)

    This reflects our expectation that carbon prices will continue to rise in an increasingly carbon-constrained world, and the inherent uncertainty in gas prices, which could also rise

    So, yes the £600 is related to carbon taxes but also to uncertainty in gas prices. One thing I would say with respect to carbon taxes is that by the 2020s the significance of AGW will either be clear or the science will turn out to have been wrong (unlikely in my opinion). Therefore one could argue that if we still have carbon taxes in 2050, then it’s likely the science will have turned out to be, roughly, correct. Hence, the argument that the £600 relates to carbon taxes and hence is a false comparison, could be regarded as circular in that it would also imply that the carbon taxes are actually taxing a true externality (i.e., they’re paying for the future cost of carbon emissions) and, hence, are a real cost.

  47. Pingback: Comments elsewhere, part III – Stoat

  48. jenw17 says:

    Anyone who wants to know where their profit is going to should sign up to Ecotricity. They use the profits to build wind turbines and research into hydro and green gas. At least you know your green subsidy is going to the right place. Oh, and they are not going to put their prices up this year.

  49. Since you’ve posted a link to your blog post here, maybe you could explain your statement from your post

    However, if the cost of providing grid connections for wind farms is taken into the green tax equation its probable that 20% of energy bills are due to green policy so a potential of saving at least £150 for everyone

    That does not appear to be consistent with what I’ve seen, so some evidence of this would be interesting to see.

  50. dave dickinson says:

    Why can’t everybody get a minimum amount of energy at a low rate to maintain minimum comfort in a few rooms. As it is I pay less for the energy I waste, and high rates for the initial units.
    This way the government would ensure a minimum safe standard and we could all pay extra for extra comfort if we wanted. It would really make people think about wasting energy at the higher rates., and provide a basic , safe limit. A bit like the minimum wage.

  51. Certainly a great aspiration. The problem I see is that UK energy companies are privatised. They have no obligation to provide energy at a lower than market rate. So, the government could then pay them to do so. Then the money comes from the taxpayer. That would go against some people’s views of how a free market should work. So, yes, I would agree that this should be an aspiration, but I think we currently live in a world where if you can’t afford to pay for a service, then that’s because you haven’t worked hard enough and so it’s your problem, not the countries. I don’t particularly like that attitude, but I don’t know how one changes it given the leaders we currently have.

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