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Policies are to Blame for Rising UK Electricity Prices

Dr John Constable: GWPF Energy Editor

Any doubt that increases in UK electricity prices are the result of energy and climate policies, rather than underlying wholesale energy costs, is firmly set aside by the recent announcement from Opus Energy that it must increase its prices to consumers by 7.5% even to those on Fixed Term contracts because of sharply rising “pass through” costs, namely subsidies to renewables, grid management, and the Capacity Market.

Opus Energy, part of the Drax Group and winner of the British Small Business award for Energy Provider of the Year (2017), has written to customers in the last week announcing a 7.5% increase in electricity supply charges. A copy of this letter has been shown to me by one such customer, together with a copy of a similar letter sent in March 2017 announcing an increase of 2.9%, a combined increase of just under 11% in the space of year.

Since these substantial increases apply even to those on “fixed term” contracts, Opus has had to explain its reasons, and in doing so it has usefully provided clear evidence that it is government energy and climate policies that are to blame, not underlying energy costs.

In its most recent letter, of 27 March 2018, Opus explains that its charges “reflect the cost of your energy, which we fixed at the beginning of your contract, and non-energy costs, which are variable and outside of our control.” The customer who wrote to me about this matter admits, ruefully, that he failed to understand the contract properly, and imagined that he had a fixed price deal, when in fact the contract clearly shows that only one element, that flowing from the wholesale price, was fixed.

In what used to be normal circumstances, his mistake would not have mattered much or at all, since until relatively recently it was rises in the conventional energy cost that a consumer might reasonably fear. The current situation is very different, and wholesale costs are of declining importance in the rising retail price. In this new world, all customers should be asking salespeople for black and white clarity as well as checking the wording of any “fixed” contract in order to ensure that it really is attractive as it appears to be. The threat now is from policy costs.

Perhaps realising that their customers will be surprised by the announcement, Opus goes on to put the blame firmly on government. “Non-energy costs”, they write “cover the cost of transporting your energy to you and provide support for Government initiatives and interventions in the energy industry, such as climate change policies”:

“Firstly, we pay third party companies to operate the electricity system and transport the energy to you. For example, this covers the costs of maintaining the infrastructure and networks used to transport the energy from the generator to you.”

“Secondly, we are charged for Governmental schemes that support renewable energy generation and mechanisms that maintain security of supply, like the Capacity Market. Such initiatives work towards ensuring a better future for all consumers.”

Opus states unequivocally that “Because these non-energy costs have increased, we need to increase your tariff by 7.500% from 1 April 2018 to reflect this. […] This is in line with the terms and conditions of your contract and are called Pass Through Amounts.”

All of these increasing “Pass Through Amounts”, namely renewables subsidies, grid management costs, and the Capacity Market, are directly attributable either in whole or at least in very large part to policies.

When government last published its Estimated Impacts of Energy and Climate Policies on Energy Prices and Bills in 2014, it forecast that prices to domestic consumers would rise from about £164/MWh in 2014 to £194/MWh in 2020 in the Central Scenario for fossil fuel prices. Wholesale energy costs were actually predicted to fall, and supplier costs and margins to remain stable, so the foreseen increase was almost entirely the result of policy driven rises in network costs, which were forecast to rise from £37/MWh to £41/MWh in 2020, the direct effects of energy and climate policies which were expected to rise from £23/MWh 2014 to £50/MWh in 2020, and the Capacity Market, which was expected to rise from nothing in 2014 to £4/MWh in 2020.

The combined effect of the two price rises announced by Opus Energy, nearly 11% over the last year, suggest that government was far from mistaken in its projections, and underlines the need for the Department of Business to at least resume publication of Estimated Impacts, and in general to be much more candid than hitherto about the effects of its policies. The widely reported and extremely critical remarks of Iain Conn of Centrica, and now this quietly outspoken letter from Opus to its customers, suggests that the industry is increasingly unwilling to carry the can.

This presents government with an opportunity. The Treasury’s moratorium on new subsidies to renewables, though welcome and necessary, is powerless to control the effects arising from existing subsidy entitlements and the associated costs of an already over-large renewables fleet. Government would be well advised to seize what may be the first signs of industry willingess to accept reform. Mr Clark, Secretary of State for Business, Energy and Industrial Strategy (BEIS) could, for example, announce an investigation into retrospective measures to reduce the effects of energy and climate policies on the wider economy. It seems probable that energy suppliers and customers alike would welcome such a move.