The Cost Of The UK Govt’s Climate Policies

By Paul Homewood

 

 

I looked the other day at the impact on electricity bills of UK climate policies, which showed that, by 2020, prices could be 40% higher than they would be otherwise. But what does this mean in terms of overall costs in the UK?

 

The overall cost for domestic users is pretty simple to work out, as DECC give us the annual consumption of electricity by sector, which last year was 113TWh. Under the central assumption of fossil fuel prices, which assumes small real price increases between now and 2020, the price of electricity is forecast by the government to be £53/MWh higher than the price of £141 without climate policies.

On an annual usage of 113TWh, therefore, this equates to an extra cost a year of £6.0bn by 2020. (The cost already being incurred this year is said to be £2.7bn).

Under the assumption of lower fossil fuel prices, which we are currently seeing, this cost increases to £6.2bn by 2020.

(Remember that all these costs are calculated at 2014 prices, so do not allow for normal inflation in years to come).

It is also worth bearing in mind that demand for electricity from domestic users is more likely to increase rather than fall, despite government projections to the contrary, as decarbonisation of transport and domestic heating is stepped up. Usage last year was 2% higher than 2011, despite the mild winter.

 

 

Domestic users, however, only account for about a third of total electricity supply, with the rest going to industry, public sector, transport etc. DECC have supplied projections for three industry classifications – small, medium and large. The projected impact of climate policies on prices by 2020 is £46, £51 and £42/MWh respectively by 2020.

Assuming a mid point of £46, and annual consumption of 233TWh, this would add an extra £10.7bn to the figure for domestic users.

Remember that, one way or another, it is the population at large who will end up paying the whole bill, whether through higher prices for goods and services, lower wages, higher taxes/poorer public services or lost jobs.

 

Although much smaller, climate policies will also add extra cost to gas bills, estimated at 6%. For domestic users alone, this will add another £1.1bn to the 2020 bill.

 

So, to summarise, climate policies will be adding £17.8bn a year to electricity and gas prices by 2020, with further increases expected afterwards.

 

	2014	2020
Domestic – Electricity	2.7	6.0
– Gas	0.8	1.1
Industry & Commerce etc	4.9	10.7
TOTAL	8.4	17.8

 

The government has laid down a budget of £7.6bn for 2020 (at 2012 prices), under the Levy Control Framework, which is

a cap set to limit the costs passed on to consumers through the long-term contracts. This cap (the Levy Control Framework) covers all of DECC’s support mechanisms for low-carbon generation and, as announced in November 2012, will be £7.6 billion (in 2012 prices) in 2020/21. New profiling of the LCF shows the cap will start in 2015/16 at £4.3 billion (real terms).

 

However, crucially, this LCF does not include all of the extra costs being added to bills. This report from the National Audit Office makes clear what is included, and what is not.

 

http://www.nao.org.uk/wp-content/uploads/2013/11/10303-001-Levy-Control-Framework.pdf

 

The items not included, as per Note 1, account for £22.50/MWh of the  price increase for domestic users by 2020, in other words nearly half of the total increase of £53/MWh. Extra costs for industry look to be even higher as a proportion.

On this basis, my projections don’t look unrealistic. And there should not really be any surprise at this. After all, it was Lord Deben’s own Committee on Climate Change who forecast that the cost of meeting the Fourth Carbon Budget, which runs from 2023-27, would be “under 1% of GDP”, suggesting a figure close to £16bn pa.

 

At the 2012 Census, there were 26 million households in the UK. On my projection of £17.8bn, this means that, within six years, our government’s climate policies will be costing every household in the country £674 a year. These figures really are horrific.

 

 

 

Sources

1) The detailed data from DECC, showing their pricing projections is below.

https://www.gov.uk/government/publications/estimated-impacts-of-energy-and-climate-change-policies-on-energy-prices-and-bills-2014

 

2) Electricity usage data. (Energy trends)

https://www.gov.uk/government/publications/estimated-impacts-of-energy-and-climate-change-policies-on-energy-prices-and-bills-2014