Energy Bill will impose immense costs on households and businesses

Today’s agreement on energy policy, ahead of the forthcoming introduction of the Energy Bill, shows the government remains committed to meeting ambitious targets on greenhouse gas emissions and renewable energy. The economic cost will be immense. The Department of Energy and Climate Change quotes a figure of £110 billion of investment in the electricity sector alone (by 2020), a high proportion of which will be used to expand offshore wind capacity and connect it to the national grid. This investment will be funded by higher bills.

A number of questionable claims are made to justify the policy. Firstly, it is claimed that new investment is required to ‘keep the lights on’ since a significant proportion of coal-fired power stations will close within the next few years.  In fact, environmental policies – in particular the EU Large Combustion Plant Directive (LCPD), which is supported by the UK government – are forcing the closure of coal-fired power stations which are not fitted with desulphurisation plants. In other words, the potential reduction in generating capacity is itself largely the result of environmental regulation.

Then there is the claim that meeting the targets on emissions and renewable will add only a small amount to bills. In reality, these policies are already inflating electricity prices by a very large degree. This is because government regulation effectively forces power companies to generate electricity from high cost sources and limits the extent to which they can deploy low-cost sources such as coal. The Renewables Obligation and feed-in-tariffs are two ways in the electricity market is rigged to achieve this result. And as long ago as the 1990s the ‘dash for gas’ was partly spurred by the imposition of EU regulations on coal-fired generation. It is telling that in US states that have refused to adopt European-style green policies, electricity prices are now over 50 per cent lower than in the UK. Indeed, DECC itself has estimated that by 2015, climate change policies will be adding 26 per cent to domestic electricity prices and 10 per cent to domestic gas prices. The impact on commercial users will be similar. This estimate implies an extra burden on energy consumers of approximately £12 billion per annum. Other environmental policies such as the LCPD will push up prices even further.  Moreover, there will be additional negative effects on the wider economy. For example, rising energy costs are likely to add to the political pressure to raise welfare benefits for those on low incomes, who spend a disproportionate share of their income on utility bills.

Despite the huge costs being imposed within the UK, these policies are unlikely to make a discernible difference to climate change. Firstly, Britain accounts for only a tiny fraction of global greenhouse gas emissions. Moreover, developing countries are rapidly increasing their carbon output. Secondly, higher energy costs in the UK are likely to displace economic activity, particularly energy intensive industries, to countries with lower costs such as China, a process known as ‘carbon leakage’. If production is less energy efficient in developing countries, as is often the case, this may actually lead to a rise in emissions. Given their questionable overall effectiveness, there is surely a strong case for the British government to moderate its green energy policies to take greater account of their impact on households and businesses. At the very least, the government should ensure that targets are met at the lowest possible cost by reforming fiscal and regulatory frameworks so that they treat different sources of emissions similarly.

23 November 2012, IEA Blog

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