“The claims of very large amounts on people’s bills are absolute nonsense.”
Chris Huhne, 19 July 2011
The background
The energy secretary returned to the battle over fuel bills this week as ministers met with the “Big Six” power firms for a summit on the spiralling cost of keeping our homes warm.
In the green corner, Chris Huhne was backed by Friends of the Earth, who produced a report hitting back at numerous articles about the supposed impact of “green taxes” on bills.
The Conservative think tank Policy Exchange kept the anti-green levy flag flying, with director Neil O’Brien saying: “Unnecessary and overly-expensive climate policies play a major and increasing role in driving up prices.”
There’s no dispute that rapidly-rising fuel bills are hitting households hard. But who is to blame for the squeeze?
The analysis
Britain’s groundbreaking “carbon budgets” aim to cut UK emissions by 34 per cent by 2020 and at least 80 per cent by 2050.
The government has a number of policies in place to encourage the big energy providers to cut emissions by relying less on fossil fuels and investing more in various forms of renewable energy.
Policies like the EU emissions trading system and the renewables obligation are designed effectively to force energy firms to redirect their resources into greener energy, but they will also inevitably push up the price of gas and electricity as the producers pass on the extra cost to the consumer.
The projected increases are significant. For example, the Department of Energy and Climate Change predicts that the cost of electricity will rise by a third by 2020 as a direct result of the government’s green policies.
Nevertheless, the effect of environmental taxes on current fuel bills has been overstated. The latest figures from Ofgem suggest only about 9 per cent of what we pay for fuel is attributable to green taxes.
And, as FactCheck discovered in an earlier post, Mr Huhne remains bullish about the future savings that could be made by the shift to a low-carbon economy.
Mr Huhne actually predicts that bills will be lower in 2020 than they would have been without the environmental measures.
DECC referred us to this table in a report from last year, but said revised estimates now mean they anticipate the overall “impact of policies on energy bill” to be a slight decrease rather than a 1 per cent rise.
While it’s not immediately clear where that optimism comes from, the introduction to the document explains that Mr Huhne is relying on a rose-tinted vision of Britain being a much more efficient, better insulated place by the end of the decade.
The report reads: “The Government has in place a range of policies to improve energy efficiency, which helps households and businesses reduce energy consumption, lessening the overall bill impact… by 2020 it is estimated that households will see a decrease in bills by an average of approximately 25 per cent if they take up both renewable and insulation measures.”
So the government’s figures only work if there is an expected surge in uptake of home and business insulation schemes by the public.
As Guy Newey from Policy Exchange pointed out to FactCheck, the projections for savings also only apply if global prices for fossil fuels – currently the biggest driver in energy bills – remain high.
He said: “They might not go up. With recent movements like shale gas, you are talking potentially huge changes in the energy industry. No one can tell us what is going to happen.”
Friends of the Earth say abandoning the renewable energy targets and increasing gas production to fill demand will add between £154 and £500 to the average household energy bill, depending on the assumed future cost of gas and coal.
The green group says it accepts the uncertainty over fossil fuel prices but points out that “it is notable that previous projections by the government have been wildly conservative about the scale of energy price rises”.
The verdict
There are simply far too many uncertainties about where we will be in 2020 to come to a definitive conclusion on whether the government is right to stick with its targets for renewable energy, and persist with the environmental taxes that are undisputably pushing up bills in the short term.
If fossil fuel prices sky-rocket, then Mr Huhne and his allies in the green lobby will be proved right.
If prices are lower than expected, critics like Policy Exchange – who want to scrap renewables targets, use more gas in the short-term and use carbon prices to let the markets find the most cost-effective low-carbon solution – will claim to have won the argument.
What we can say now is that green taxes account for less than 10 per cent of current bills – far less than has occasionally been reported, but not insignificant.
And we do know that Mr Huhne’s optimistic predictions about his policies bringing bills down in the long-term are based on very optimistic assumptions about energy efficiency.
Deutsche Bank, who produced a report on fuel poverty last week, are not the only ones who are “somewhat sceptical” about whether schemes to encourage increased energy efficiency will prove cost-effective.
Another unanswered question is the government’s real attitude to nuclear power.
As FactCheck found last week, there is some evidence that ministers are effectively handing the nuclear industry a public subsidy, despite claiming that the opposite is the case.
This begs the question asked by the energy and climate change select committee: is the government really more keen on atomic power than other renewables? And if so, why doesn’t it just say so and find a better way to encourage investment in nuclear power stations than the current system of green taxes?
By Patrick Worrall
