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26/10/2017

Report: Energy costs more than it needs to

Words: Laura Edgar
Energy Costs / iStock-500479415

The cost of energy is 'significantly higher' than required to meet the government’s objectives, and to be consistent with the Climate Change Act and ensure the security of supply, according to a report by Dieter Helm CBE.

Further, “energy policy, regulation and market design are not fit for the purposes of the emerging low-carbon energy market, as it undergoes profound technical change”, says Helm.

In August 2017, the government asked Helm to consider the whole electricity supply chain of generation, transmission, distribution and supply.

Cost of Energy Review notes that the prices of oil, gas and coal have fallen significantly since late 2014. This is contrary to the modelling and forecasting done by the former Department of Energy and Climate Change (DECC) and the Committee on Climate Change.

Since then, the price of renewables and addressing intermittency has been coming down “too fast”, with new battery and other storage and demand-site options becoming available.

Such new technologies should mean lower costs, not higher, and much greater scope for energy efficiency.

“Margins should be falling as competition should be increasing. Yet in this period, households and industry have seen limited benefits from these cost reductions. Prices have gone up, not down, for many customers.”

Excessive costs, Helm notes, are an unnecessary burden on households and businesses, and “they risk undermining the broader democratic support for decarbonisation”. They are also locked in for at least a decade owing to contractual agreements made by the government.

These agreements include Renewables Obligation Certificates, feed-in tariffs, and low-carbon contracts for difference grant for renewable energy schemes in their early stages.

“The task is to find ways of minimising the burden these impose, and making them transparent, ring-fenced, and separated out from the market, where costs should be coming down.”

The report also notes that households and businesses have not benefited as much as they should have because of legacy costs and policies.

Helm makes a number of recommendations, including:

  • The legacy costs from the Renewables Obligation Certificates, the feed-in tariffs and low-carbon contracts for difference “are a major contributor to rising final prices, and should be separated out, ring-fenced, and placed in a ‘legacy bank’”. Helm said they should be charged separately and explicitly on customer bills. Industrial customers should be exempt. Once taken out of the market, the underlying prices should then be falling.
  • The most efficient way to meet the Climate Change Act target and the carbon budget is to set a universal carbon price on a common basis across the whole economy, harmonising the multiple carbon taxes and prices currently in place. This price should vary. It would be significantly lower than the cost of the current multiple interventions.
  • The feed-in tariffs and other low-carbon contracts for difference should be gradually phased out and merged into a unified equivalent firm power (EFP) capacity auction.

Energy secretary Greg Clark said: “Homes and business depend upon reliable, affordable power and the government is ambitious in its plans to keep costs as low as possible for them over the coming decades.

“We are already taking significant steps to upgrade our energy infrastructure as part of the industrial strategy and have published draft legislation to cap poor value energy tariffs helping millions of consumers across Britain.

“I am grateful to Professor Helm for his forensic examination. We will now carefully consider his findings.”

Responding to the publication of a review of energy costs by Professor Dieter Helm,

RenewableUK’s chief executive Hugh McNeal said: “Professor Helm’s report supports the view that renewables are set to become the backbone of the UK’s modern power system and that a flexible grid will ensure costs for consumers are kept as low as possible.

“The cost of renewable energy has fallen further and faster than anyone predicted - and Professor Helm predicts that this trend will continue. Offshore wind costs have dropped by 50 per cent since 2015, making it cheaper than nuclear and gas. When it comes to keeping bills down, low-cost onshore wind is a crucial technology for consumers and must be allowed to compete on a level playing field."

Cost of Energy Review can be found on the Department for Business, Energy and Industrial Strategy website (pdf).


Read more:

Businesses could make deals with government in new industrial strategy

Capital gains: An interview with Dieter Helm

Green belt is key natural capital asset, says Helm


Image credit | iStock

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