Wednesday, October 05, 2011

Renewable electricity touches 10% - and hardly affects energy prices

Wind, hydro and other renewables supplied 50% more electricity than in the same period last year, and now represent almost 10% of all electricity generated.

But there have been howls of protest from energy intensive industries, echoed by Goerge Osborne at the Tory Party Conference, that the cost of all the Government policies leading to this success is pushing up energy prices.

But the Government's own documents show this is not true.

Meanwhile, there is other good news in the latest quarterly energy figures, at least in terms of carbon emissions:
  • electricity consumption was 1½% lower than in the second quarter of 2010

  • fossil fuel dependency was at a record low of 85.7 %
  • .
  • the supply from coal in the second quarter of 2011 fell 2.3%, gas decreased by 18.3% and nuclear rose by 38.3%

  • in the second quarter of 2011 renewables accounted for 9.6% of electricity supplied, whilst nuclear supply exceeded 20% for the first time since the second quarter of 2006

  • the total electricity supplied by all generators in the second quarter of 2011 was 1.7% lower than a year earlier

  • final consumption of electricity for domestic use decreased by 3.7%.

This will all have the positive consequence of having reduced overall carbon emissions in the last year.

But prices have been rising. Average industrial gas prices, including the Climate Change Levy (CCL), were 34.1% higher in current terms in Q2 2011 compared to Q2 2010, whilst prices excluding CCL were 35.4% higher.

Average industrial electricity prices including CCL were 2.7% higher, coal prices were 11.9% higher, heavy fuel oil prices were 22.1% higher and the UK retail price for petrol was ranked sixth highest in the EU, with the UK diesel price the highest in the EU.

On the domestic front, electricity prices were 4.0% higher, domestic gas 6.2% higher and the price of heating oils a whopping 28.8% higher than Q2 2010.

Yet we can take some comfort that UK prices for medium domestic gas and electricity consumers, including tax, were the lowest and third lowest in the EU 15 respectively.

The cost of promoting low carbon energy

But is it true that a significant proportion of these price rises are due to Government policies to reduce carbon emissions?

Energy and climate change policies are funded by a mixture of levies and general taxation. Levy-funded policies (such as the renewables obligation (RO), feed-in tariffs (FITs) and warm home discount (WHD)) place the obligation of financing the policies onto energy companies which is then passed onto the consumer.

Estimates of how these levies impact the public finances were published in Budget 2011, and include for 2010-11 £0.7 billion from the Climate Change Levy and £0.6 billion from other environmental taxes, matched by a similar expenditure on these taxes.

The latest figures for the cost to the public purse for the development, construction and installation of low carbon electricity generation (latest figures) are as follows:


The Renewables Obligation: £1.1 billion
R&D grants for renewable energy technologies: £90.1 million
R&D grants for nuclear related technologies: £35 million
Total: £1.225 billion


R&D grants for anaerobic digestion technology: £1.3 million
Capital grants for renewable energy: £30.85 million
Feed-in tariffs: £10.7 million
Total: £42.8 million
(source: Parliamentary Answer by Charles Hendry, Minister of State for Renewable Energy, Energy and Climate Change, 15 Sept. 2011)

The Treasury of course keeps a cap on levy-funded spending by DECC.

DECC estimates that the impact of energy and climate change policies on average gas and electricity prices and bills paid by large energy intensive users compared with prices and bills in the absence of policies is a 2% rise this year rising to a 4% rise in 2020 for gas, and a 12%-20% rise this year and a 17% to 52% rise in 2020 for electricity.

This sounds like a lot. But, to put this into context, average electricity prices faced by large industrial users rose by a huge 45% in just two years between 2007 and 2009, largely as a result of volatile fossil fuel prices.

In addition, the wholesale fraction of the retail gas price faced by large energy intensive users (excluding the cost of carbon) is around 90%, and around 70% - 80% of the retail electricity price paid by these users.

Wholesale gas prices are expected to continue to rise, with forward market prices trading at 76p/therm in 2016.

The truth is that fossil fuel price volatility has been, and is expected to continue to be, a bigger driver of energy price variations than the impact of energy and climate change policies.

The proposals outlined in the Electricity Market Reform White Paper are supposed to mitigate the impacts of policies on prices and bills by reducing the costs of support for low carbon generation (compared with what the cost of the Renewable Obligation would have been in the absence of the EMR), reducing them by 2% in 2020 and 8% in 2030.

DECC makes the further point that looking at the effect on prices alone is misleading - it's the bills that count.

These will be lower in fact because of the effects of policies to encourage a reduction in consumption due to energy efficiency, which is greater than the effect on the bill from the increase cost per unit of retail gas (as a result of the Climate Change Levy).

Additionally, it is hoped that the introduction of a Carbon Price Floor (CPF) starting at £16/tCO2 in 2013 and rising to £30/tCO2 in 2020 and £70/tCO2 in 2030 will increase decarbonisation of the grid, and therefore improve price stability and increase energy security.

An updated assessment of the impact of energy and climate change policies on energy prices and bills for households and businesses and bills will be published alongside the Annual Energy Statement.

Around the same time the Government has committed to publishing details of its support for energy-intensive users.

So, if you're worried about high energy bills, the people who deserve the most blame are the fossil fuel suppliers, and there is no shortage of incentives and support to reduce the bills.

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