Is 'green crap' really driving up energy bills?

Perversities and spin surround claims of 'green levy overspend'

By Richard Black

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By Richard Black, ECIU Director

It's looking likely that Britain’s renewable energy companies are about to be hit again with another round of subsidy cuts. Advance briefings by 'government sources' make clear that the cuts are posited on the theory that energy bills are 'unaffordable' - and yet bills are going down...

Perverse? Politically spun? Indeed. And here are five reasons why:

‘Overspend? What overspend?’

George Osborne's Levy Control Framework has created a perversity at the heart of clean energy policy. Image: altogetherthefool, Creative Commons licence
George Osborne's Levy Control Framework has created a perversity at the heart of clean energy policy. Image: altogetherthefool, Creative Commons licence

Back in the distant days of the coalition government – remember that? – the Treasury set up a mechanism for making sure that ‘green levies’ on energy bills didn’t exceed a certain amount. It’s called the Levy Control Framework or LCF.

To read some of things that ‘government sources’ have been saying this week, you’d think that the LCF was an actual pot of money. It’s not. It’s a notional target, decided by politicians for political reasons, concerning spending of money that comes from people and businesses rather than from government coffers.

It’s legitimate for those ‘government sources’ to say that the target is likely to be exceeded – but to talk of an ‘overspend’ when there’s no fixed budget is, as they used to say, a little ‘economical with the actualité’.

What goes up must go down - but surely not at the same time?

There’s a central perversity in the way clean power is funded.

Large-scale projects, be they wind, solar, biomass, nuclear, or carbon capture and storage, are all now to be funded through a mechanism called Contracts for Difference (CfDs). Developers receive a guaranteed price for electricity from each project – for example, £92.50 per megawatt hour (MWh) for the proposed Hinkley C nuclear power station. If the market price of electricity is below this level, the difference is made up from levies on energy bills.

Historically, the main driver of the market price is the wholesale price of gas and coal, since that’s where the majority of our electricity comes from.

Historically, energy bills have been driven up or down mainly by changes in the wholesale gas price

The wholesale gas price has recently been falling. So the market price of electricity is low, and looks likely to remain that way for a fair while. This means developers will receive larger sums than anticipated through their Contracts for Difference. CfD spending comes under the LCF. This is one of the main reasons why the target for LCF spending looks likely to be exceeded.

However, more generally, low wholesale gas prices are driving bills down. British Gas has just announced a cut in customers’ bills, and other major providers are expected to follow suit.

Yet the Treasury is demanding cuts in clean energy levies because, they say, bills are unaffordable.

From any common-sense point of view it’s sensible to invest in clean energy when energy costs are fairly low and interest rates on money borrowed also low. These are indeed ideal times. Except it’s ‘unaffordable’, due to the Treasury’s perverse LCF mechanism.

The tiny costs of ‘green’

There’s a bit of a spat going on this week between two think-tanks who’ve both worked out the details of what goes into people’s energy bills. Policy Exchange reckons ‘green levies’ stand at about 4.5% of the average bill, Green Alliance has them at 3%. (If you add in social levies – for example, funding for insulating the poorest homes – that brings the figure up to about 7%.)

The costs of network upgrades dwarfs that of renewable electricity. Image: Russ Ferriday, Creative Commons licence
The costs of network upgrades dwarfs that of renewable electricity. Image: Russ Ferriday, Creative Commons licence

To put that in perspective - British Gas's 5% price cut has more than wiped out the impact of 'green crap'.

And 'green' and social spending is dwarfed by the whopping 22% spent on maintaining and improving transmission and distribution networks.

The reason why these sums are being spent will be familiar to any long-term user of the London Underground. Just as we’re seeing with tracks, signalling, trains and stations, the power grid in particular is having to make up for decades of under-investment.

Policy Exchange, in its report ‘The Customer is Always Right’, suggests among other things that these network costs need to be looked at. They’re surely right.

But with the vast majority of power outages occurring because of breaks in Britain’s ageing distribution grid rather than shortfalls in generation, it’s also clear that network upgrades are a prudent measure if we want to keep the lights on.

And again, paying for them when both energy prices and the cost of borrowing are low is, presumably, a better idea than waiting for high energy costs and high interest rates.

Penalised for success

To listen to critics, ‘windmills’ are useless. Sometimes the wind doesn’t blow. Who knew?

Ironically, another of the reasons why the LCF target is set to be exceeded is that those windmills have been too good.

The government assumes that offshore wind turbines will on average generate electricity for 37.7% of the time. But as so often with renewable energy, it has been using out-of-date data – new offshore turbines are achieving 43%, and that’s set to rise still further.

That means they’re producing more electricity than expected, which in turn leads to developers receiving more LCF money than expected.

You could easily argue that if a technology exceeds expectations, it should be rewarded. Here, it’s to be punished.

Nuclear exclusion, fossil costs

The cost of renewable energy is falling.

The solar story is well-known – about a 70% cost reduction in five years – but wind is going through the same process albeit a bit more slowly. With appropriate and falling levels of subsidy building a robust industry, this would probably be the last Parliament that would ever need to support onshore wind and solar.

Offshore wind is following the same trajectory. A report this week from consultants BGV - endorsed by Amber Rudd - concludes that by 2020, offshore wind will cost about the same as that from new gas-fired power stations.

Yet support for all these technologies is being cut.

Odds seem to be calculated differently for various energy technologies. Image: zoomar, Creative Commons licence
Odds seem to be calculated differently for various energy technologies. Image: zoomar, Creative Commons licence

It makes a stark contrast with the situation regarding Hinkley C. If the station goes ahead on schedule, its CfD contract specifies that EdF will receive £92.50 per MWh in 2023 and will still be receiving it, plus inflation, in 2058 – by which time, Lord knows how cheap wind and solar electricity will be. Maybe we'll be generating juice from cultivated algae or buying it from Pluto - who knows?

Whatever, Hinkley's CfD contract will be the gift that keeps giving.

Meanwhile, the unnamed ‘government sources’ have been less keen to tell journalists that the projected subsidy for the capacity market – under which coal, nuclear and gas-fired power stations are paid to exist – has also risen.

Projected in March to be around £0.6bn per year by 2020, this month’s Office of Budgetary Responsibility report reckons it’ll be half a billion more. That’s nearly a 50% rise in projected spending – far greater, in proportional terms, than the LCF ‘overspend’.

But the 'brown crap', unlike the green, doesn't come under the LCF even though it is funded from levies on people's bills - and so, apparently, it doesn't matter.

The costs associated with clean energy are rising, there's no way around it. It's something that green groups haven't been too keen to highlight, but there it is.

However, what's also rising, apparently, is the rate of spin - which is surely not good news given the importance of the issue for energy affordability, energy security and climate change. The stakes are too high for playing 'blame the green crap'.

NB Article amended after publication to give correct units for Hinkley strike price - thanks to comment below