Gummer Has Grossly Underestimated The Cost Of The Climate Change Act
By Paul Homewood
As part of their Fifth Carbon Budget, the Committee on Climate Change calculated how much their proposals would cost, which would then need funding by the Levy Control Framework. (The LCF in principle caps the costs that can be passed onto consumers as a result of government policies).
According to their calculations, costs would peak in 2028, at £9.4 billion. It is worth pointing out here that this number does not include any allowance for the cost of the Capacity Market Mechanism, estimated by the OBR at £2.7 billion for 2020/21. It merely covers the cost of electricity generation from renewables and other low carbon sources, over and above the normal market price.
However, there is a big con going on here. The wholesale price of electricity is already artificially inflated by the Carbon Price. Moreover, the plan, and therefore the above costs, also assume that this carbon price will be gradually raised in coming years.
Put simply, the cost of subsidising renewables in years to come is grossly understated, because they are being compared with an artificially inflated market price.
(For clarification, the CCC state that “we use the long-run marginal cost of a new-build gas plant as a proxy for the electricity price”).
To find out how much the cost of subsidy has been understated, I asked the CCC for their detailed calculations, and they have sent me their spreadsheet.
Don’t worry too much about the actual numbers. The total cost is on the bottom line, and you can probably just about see the cost of £8021 million in 2030.
Of more interest though is the top line, Wholesale Prices, which rises from £51.98/MWh in 2016, to £84.37 in 2030.
On the “Lists” tab, they show how much of this wholesale price is Carbon Price Uplift. By 2030, the “wholesale price” will include £27.52/MWh for the carbon price, up from £8.06 this year.
It is this sleight of hand that enables the CCC to claim that the cost of decarbonisation will start to fall after 2028.
Using their generation figures, we can recalculate what the real cost of their policies will be:
By 2030, the annual cost will be £15.6 billion, instead of the £8.0 billion claimed. Over the next fifteen years, the total cost will be £157 billion. Again, remember that this does not include the cost of providing standby capacity.
One more thing to note. All of the calculations are based around the central case for power prices. This gives a current price of £51.98/MWh, whereas the low case is £43.88. Although I would not argue with using the central case, it is worth pointing out that the current wholesale price is £43.80.
If prices remain low, the cost of subsidising renewables will be much greater than anticipated.
The CCC spreadsheet also contains a lot of useful information about prices for various renewable technologies. I will be saving this for a future post!