Dieter Helm’s report about energy pricing is now in, and it makes highly embarrassing reading for the government.
This Telegraph article is intriguingly co-written by our friend Jillian Ambrose and the Political Editor, Gordon Rayner (the latter probably keep her honest!)
Consumers are paying too much for their energy because of “excessive” green taxes added to bills, a damning Government-commissioned report has found.
A series of “spectacularly bad” decisions by ministers have “unnecessarily burdened” households and businesses with higher green energy subsidies than necessary, according to Prof Dieter Helm, of Oxford University.
The cost of renewable energy – as well as gas, coal, and oil – has fallen but the benefits have not been passed on because ministers locked the taxpayer into long-term contracts that overestimated those costs, Prof Helm found.
Green taxes will cost the average household almost £150 from next year, according to energy firms.
Prof Helm said this was “significantly higher than it needs to be” to meet the Government’s objectives of cutting down on the use of fossil fuels and promoting renewable energy.
He was asked to undertake the research after Theresa May, the Prime Minister, vowed to tackle “rip-off” bills. However, the industry expert placed the blame on the Government’s own policies.
“Significant institutional reform” should be brought in to reduce the Government’s role and allow the market to function efficiently, Prof Helm said.
His Cost of Energy Review said: “Each successive intervention layers on new costs and unintended consequences. It should be a central aim of Government to radically simplify the interventions, and to get Government back out of many of its current detailed roles.”
Green energy taxes, which were introduced as part of the 2008 Climate Change Act, have caused controversy ever since because some MPs regard them as “regressive”, penalizing those who can least afford them.
There are also divisions over whether the levies are justified, particularly with respect to subsidies for wind farms, with opinion split over whether they are an unnecessary blight on the landscape.
In August the Office for Budget Responsibility warned that the cost of the subsidies would more than treble over the next five years, from £4.6 billion in 2015-16 to £13.5 billion in 2021-22.
The costs of “decarbonisation” account for around 20 per cent of typical electricity bills, according to the report. Consumers will have paid well over £100 billion by 2030, and Prof Helm says that “much more decarbonisation could have been achieved for less; costs should be lower, and they should be falling further”.
He said ministers’ forecasts of future energy costs had been far too high, but “many of these excessive costs are locked in for a decade or more, given the contractual and other legal commitments governments have made”.
In particular, contracts had been given to “early stage” wind, solar and biomass companies whose costs had since been hugely undercut by other firms using much more advanced technology, Prof Helm said.
He said energy firms should be forced to declare their profit margins on bills and also called for the cost of existing contracts to be ring-fenced into a “legacy bank” and shown separately. The legacy charge should not be paid by heavy industry, he suggested.
Gareth Stace, director of UK Steel, said a “persistent and sizeable gap” existed between energy costs in Britain and competing markets.
The review is the second major report to criticise government energy policy in recent years after the Competition and Markets Authority dismissed many of the early claims of market abuse made against energy companies. Instead, it warned that many policy decisions had harmed competition.
Greg Clark, the Business and Energy Secretary, said: “I am grateful to Professor Helm for his forensic examination. We will now carefully consider his findings.”
As the comments in the Telegraph make resoundingly clear, the real problem is the Climate Change Act and successive governments’ obsession with decarbonization.
Helm makes several recommendations, including:
- Feed-in tariffs, contracts for difference and the capacity market auction should all be merged into a unified equivalent firm power (EFP) capacity auction. Low-carbon generators would be forced to bear the costs of their intermittency.
- The legacy costs of the renewables obligation, feed-in tariffs, and contracts for difference should be separated out, ring-fenced and placed in a “legacy bank”. They should be charged separately on customer bills and industrial energy users should be exempt.
- The government should establish an independent national system operator (NSO) and regional system operators (RSOs) under public ownership. They should take on a number of duties currently undertaken by distribution network operators (DNOs) and Ofgem.
- The RSOs should be responsible for securing local energy supplies and should do this by contracting out system requirements. This process should take the place of periodic reviews and price caps under the RIIO framework. DNOs would effectively become contractors – “one of a number of competitive suppliers”.
- Carbon taxes and prices should be harmonized by setting a universal carbon price across the whole economy. There should be a border carbon price to prevent emissions being exported.
- Separate licenses for the generation, supply and distribution should be replaced by a simpler, single license, at least at the local level.
- Standard variable tariffs should be superseded by default tariffs based on an index of wholesale costs, the fixed cost pass-throughs, levies and taxes, and a published supply margin. The government’s proposed price cap should take the form of a cap on the supply margin.
- The government should give an annual statement to parliament, setting out required capacity margins and guidance for the NSO and RSOs.
Most seem to be to be simply rearranging the deck chairs, whilst at the same time adding even more bureaucracy.
His idea that low-carbon generators should bear the cost of their intermittency is an interesting one, but as these will simply be passed on in any auction price, consumers will surely still end up paying.
As I have been pointing out for a long time, signing up long-term contracts for low carbon generation at high prices, rather than waiting for technology to deliver lower costs was always a huge mistake. But, unfortunately, we are now stuck with these costs.
If the government is serious about stopping electricity bills rising even higher in the next few years, it only has one serious option – put an end to all new subsidised contracts for renewables, and allow the market to operate freely.
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