The true cost of energy and climate change policies on bills


DECC hits back at inaccurate Daily Mail reports on cost of green policies

Recent reports in the media have claimed that DECC's policies to promote energy efficiency and low carbon energy are currently adding £200 to the average household energy bill. Based on a typical annual household gas bill of £608 and electricity bill of £424, it is claimed that these policies make up between £154 and £206 of a typical household dual fuel bill.

This is not true.

Analysis by both DECC and the independent regulator, Ofgem, puts this figure at around £70 to £90 (or 7% to 8%).

Where do the £154 to £206 figures come from?

In July 2010, DECC published its estimates of the impacts of energy and climate change policies on energy prices and bills faced by households and businesses. This analysis stated that policies were estimated to be adding 14% to the average electricity price paid by households in 2010 (20% for medium-sized non-domestic users), compared to what the electricity price would have been in 2010 in the absence of policies. This has been incorrectly translated into the 15 to 20% impact on household energy bills which of course include both electricity and gas.

The typical household gas and electricity bill (£608 and £424) are taken from Ofgem's January 2011 Updated Household energy bills explained fact sheet.

(£608 + £424) x 15% = £154.8

(£608 +£424) x 20% = £206.4

Why are these figures incorrect?

The impact of energy and climate change policies on the typical household, as reported in some recent media, is incorrect for the following key reasons:

1. The 14 to 20% figures above relate to electricity price impact and yet they have been applied to both gas and electricity bills. We estimate the policy impact on gas prices to be much less (4%). Typically, gas represents the larger portion of the household dual fuel bill. Applying a 15 to 20% increase on the gas bill, therefore, overestimates the impact of policies on an average household gas (and so dual fuel) bill.

2. The upper estimate of 20% reflects the estimated impact of policies on the average non-domestic user's electricity price. Non-domestic users are typically larger energy users who can negotiate lower retail prices overall primarily due to bargaining power and economies of scale. As such, any impact on their already lower price will result in a larger % figure. In addition, non-domestic users face a different set of environmental costs compared with household users. It is, therefore, incorrect to apply this figure to households.

3. The 14 to 20% figures relate to how much policies add on to a price which excludes these costs, not their share of a price which includes these costs. The share of the final price (which includes policies) will necessarily be smaller (see below).

So what's the right answer?

To determine what the impact of policies is on the two bills identified (based on DECC's July 2010 estimates), the following figures need to be applied:

* Policies add 4% or £1/MWh to the average gas price, taking it up to £36/MWh. This means policies represent 1/36=4% of the average gas price and bill in 2010.

* Policies add 14% or £15/MWh to the average electricity price, taking it up to £122/MWh. This means that policies represent 15/122=12% of the average electricity price and bill in 2010 (not 14%).

Applying these to the same bills we get (figures may not add due to rounding):

4% of £608 = £22

12% of £424 = £51

£22 + £51 = £73 (or 7% of the average household's dual fuel bill)

This is based on DECC's analysis of the impact of policies in 2010. We will be publishing an updated assessment (including for 2011) later this year alongside the Annual Energy Statement.

Based on Ofgem's January 2011 fact sheet, they also estimate that environmental policies (excluding the cost of the EU Emissions Trading System (EU ETS) on electricity generators) represent around £67 of a typical household energy bill. When the cost of EU ETS is included, this is expected to take this figure up to £85 (or 8%).

And what is this money paying for?

These are not direct levies on our energy bills but do impact on the prices retail gas and electricity suppliers charge us. The costs largely relate to policies designed to reduce our reliance on fossil fuels and improve the energy efficiency of our homes.

In particular, through policies such as the Carbon Emissions Reduction Target (CERT) and the Community Energy Saving Programme (CESP), energy suppliers provide free and subsidised insulation improvements and other energy efficiency measures to consumers across the country.

As such, while a proportion of a household's current energy bill pays towards these policies, the net impact of these policies on a household which takes up an energy efficiency measure under these schemes will likely be to reduce their energy bill.

Christalla Kyriacou is an Economic Advisor at the Department of Energy & Climate Change

This article first appeared at the DECC Blog

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