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Pressure Mounts To Scrap Hidden Green Taxes On Energy Bills

One way for the government to make a real difference to energy costs would be to abandon the “renewables obligation” and the carbon floor price. This would cut bills by 13 per cent from 2015, according to Deutsche Bank.

As British households cope with a remorseless rise in energy bills, two of the coalition’s most cherished objectives find themselves on a collision course. The government has proclaimed its ambition to be the “greenest ever”, but it also wants to stop the average voter from falling into “fuel poverty” by the next election.

The most important determinants of energy bills are beyond the power of any politician to influence. Wholesale gas prices, set by the international market, have been the governing factor behind the 117 per cent rise in average dual fuel bills since 2004.

The profits of the “big six” utilities, meanwhile, attract the most attention, but are far less significant than might be thought. Deutsche Bank forecasts that UK households will spend £48bn on energy in 2015 and of this, only £1.3bn will be the post-tax profits of retailers. Even if those earnings were to be cut in half, this would have only a minimal impact on bills.

Populist attacks on the “big six” utilities may serve only to raise false hopes. “A political expectation is being created in people’s minds that if we can bash the retailers, that will lower bills. But the numbers just don’t support that,” said Martin Brough, director of industrials research at Deutsche Bank.

That leaves the government with little choice but to reassess its own policies. At present, “policy costs” add 10 per cent to household energy charges, principally via the “renewables obligation”, which compels suppliers to buy a proportion of their electricity from renewable sources, and the European Union’s carbon trading scheme.

But this percentage is set to rise. Ben Moxham, Downing Street energy adviser, predicted in a note in July to David Cameron, prime minister, that government policy would add 30 per cent to the average electricity bill by 2020.

Independent experts corroborate this forecast. The “renewables obligation” imposed £1.3bn on bills last year, according to Credit Suisse, and this sum will climb to £2bn in 2013. In that year, the government will also introduce a carbon floor price, intended to make coal and gas-fired power stations more expensive to operate.

Radical reforms of the electricity market proposed by Chris Huhne, the energy secretary, are intended to come into effect at about the same time. These are designed to unlock £200bn of investment in infrastructure, principally new nuclear power stations and renewable sources of electricity, notably offshore wind farms.

The idea is to make it viable for utilities to invest in these technologies, largely by guaranteeing a fixed price for all electricity generated by these means. But the cost of this capital investment will inevitably feed through into higher bills.

One way for the government to make a real difference to energy costs would be to abandon the “renewables obligation” and the carbon floor price. This would cut bills by 13 per cent from 2015, according to Deutsche Bank.

Another possibility would be to offer lower guaranteed prices for green electricity, with the aim of attracting companies willing to accept modest returns. But Mark Freshney, utilities analyst at Credit Suisse, pointed out the problem: “Yes, the companies that build the wind farms might be willing to take a low return,” he said. “But the consumers still have to pay the capital costs plus the return.”

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