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Climate Policies, Electricity Prices And The Energy Price Cap

Global Warming Policy Forum

In the run-up to the general election on 8 June, the GWPF is calling on all parties to adopt policies that prevent further economic harm to the UK economy and halt the rising policy costs to energy bills for households.

Theresa May is proposing a cap on increases to energy prices charged on the Standard Variable Tariff, which covers about three quarters of the United Kingdom’s 26 million households. It is essential to grasp that she is proposing a cap on the prices for gas and electricity charged under some domestic energy tariffs. It is not a cap on bills and it does not affect all tariffs.

The Prime Minister has suggested that this controversial move is the result of some deep-seated injustice in the energy markets. She says that “if you want fairer energy prices vote for me”. The implicit target here are the energy retailers, a safe target since no one trusts them.

In response, energy companies claim that renewable energy subsidies and other policy-driven costs are the main cause of recent price rises.

The last set of data published by the Government in 2014 shows how policies have been driving up prices to domestic consumers, and how they threaten even greater price impacts in the future.

The cost of government policy on electricity prices in 2014 was estimated have increased prices by 17%, some £24/MWh. These figures were essentially confirmed by the Committee on Climate Change’s more recent study of Energy Prices and Bills which estimates that in 2016 climate policies were still responsible for about 17% of the total electricity price to household consumers.

Median electricity consumption of electricity in the UK is approximately 3.5 MWhs, so this amounted to about £91 per household per year, or roughly £2.4 billion a year, assuming 26 million households.

The Prime Minister says that she is “fed up with rip-off energy prices”, and claims that consumers pay £1.4bn a year more on Standard Variable Tariffs than they need to. Yet the government’s very own climate policies are responsible for a much bigger rip-off, more than £2bn a year in fact, just on domestic electricity bills.

Furthermore, UK climate policies add another £4bn to the bills of industrial and commercial consumers, a cost that they pass on to households in higher prices of goods and services. If a supermarket has to pay more for electricity to run its refrigerators it must recover this cost in the price of fish fingers and milk and the checkout.

Energy and climate policies have a negative effect on the general cost of living that is both much larger and much broader than any defects in the Standard Variable Tariff. According to the government’s own estimates this problem is set to grow dramatically. In 2020 the price impact will have more than doubled, to £52/MWh, or about £180 a year on the electricity bill, a nationwide cost of about £5 billion per year.

Moreover, according to official figures, the Climate Change Act will cost the UK economy over £300 billion by 2030, costing each household £875 per annum.

The Prime Minister is clearly right to be concerned about the cost of energy to households, but in seeking to put price caps on energy suppliers she has chosen the wrong target, energy retailers, and the wrong instrument, price caps. Her own government policies are much more of a problem, and much more readily addressed.

Price caps will almost certainly prove to be counterproductive, causing higher prices later in the cycle as the result of damage to investment signals. It would be both simpler and more effective, and much more beneficial to consumers, to abandon all extravagant and ineffective subsidy spending on renewable energy that is driving prices up for years to come.

See also GWPF Energy Manifesto 2017