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The True Cost Of Energy and Climate Change Policies On Bills

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.

18 Responses to “The True Cost Of Energy and Climate Change Policies On Bills”

  1. Bob Ward says:

    Ofgem has published a new factsheet which estimates that energy efficiency and environmental policies account for £100 of a typical household dual fuel bill of about £1300: http://www.ofgem.gov.uk/Media/FactSheets/Documents1/Why%20are%20energy%20prices%20rising_factsheet_108.pdf

    This appears inconsistent with DECC’s estimate that such policies were only reponsible for £42 of a dual fuel bill of £1100 in 2010: http://www.google.co.uk/url?sa=t&source=web&cd=1&sqi=2&ved=0CCsQFjAA&url=http%3A%2F%2Fwww.decc.gov.uk%2Fassets%2Fdecc%2Fwhat%2520we%2520do%2Fuk%2520energy%2520supply%2F236-impacts-energy-climate-change-policies.pdf&rct=j&q=Estimated%20impacts%20of%20energy%20and%20climate%20change%20policies%20on%20energy%20prices%20and%20bills&ei=TgycTrT-C8Gx8gOyxI3kBQ&usg=AFQjCNGmZdk_j_wWVNsq44ALcRlA_BFrOQ

    Could you explain why there is such a discrepancy?

    • Christalla Kyriacou says:

      Hi Bob,

      Thanks for your comment.

      With regard to your question: The £42 impact of policies on a dual fuel bill from DECC’s analysis published in July 2010 represents the difference between an estimated typical household dual fuel bill in 2010 with and without policies. This, therefore, also accounts for the impact energy efficiency policies were estimated to have on reducing energy consumption in 2010. As per Chart 1 in the same document, DECC estimated that, in 2010, policies represented approximately 7% of a typical household dual fuel bill.

      Ofgem’s £100 reflects what share of a dual fuel bill of £1300 they estimate the costs of energy and climate change policies to represent in 2011 (i.e. not accounting for the impact of efficiency savings). In other words, they estimate policies to represent approximately 7.7% of a typical household dual fuel bill in 2011, which, given Ofgem’s is an updated number and potential differences in consumption assumptions, is broadly consistent with DECC’s estimates for 2010.

      DECC will be publishing updated analysis on this alongside the forthcoming Annual Energy Statement due later this year.

  2. Martin S says:

    Are there any incentives to use LED lighting? With newer LED lights, we could replace many halogens with 3w or 5w LED lights. Also, they last longer, producing less toxic waste.

    • Peter Jenny says:

      I agree with Martin. LEDs are best option to save energy bills after photovoltaic option. But in countries like UK the latter option may not be very successful leaving LEDs the only option.

  3. Michael Rundell says:

    The point the Mail and Express fail to mention is that if greening your energy supply will cost X, then (eventually) NOT greening it will cost 2 x X, or more. Those clinging desperately to the status quo don’t seem to have noticed that bills for conventional energy are going up way ahead of inflation. This is so obvious: in the medium term, the cost of renewables can only fall (economies of scale, improved technologies) and the cost of fossil fuels can only go up (rising demand, falling supplies). Simples!

  4. Peter Gambrill says:

    Does the DECC estimate of £73 include the cost of the EU ETS?

  5. [...] Of course, it’s sometimes argued that the influence of the press on public opinion is exaggerated – and there may be some truth in that. But I think on an issue such as renewable energy, where fairly small numbers of “antis” can block or delay major installations, every negative story or piece of misinformation counts. (And there’s no doubt that there is plenty of misinformation on this topic alongside all the legitimate opinion: to give just one example, the Mail recently made a big deal about the costs of renewable energy policies on household bills but inflated the true figure by more than 100% due to an almost laughable number of deliberate or accidental errors in their calculations.) [...]

    • Redcar says:

      The renewable energy process must be sped up. In Redcar we faced early opposition to the wind turbines, however now we have them i think the local residents are becoming used to them. They are visible from virtually every angle in Redcar. The main question is once the renewable energy is mastered does this main a long term plan to reduce energy costs for families or will they increase? OFGEM mentioned many times here should lobby the suppliers a lot harder to reduce costs for everyone.

  6. Yet, there is still no help for the houses which do not have cavity walls.

  7. [...] And, yet, today, it is calling for a new green tax to be introduced to drive down the use of plastic bags?! Why the double standards? In fact, the Mail’s anti-green tax agenda has been so feverish of late that it has been caught out over-egging its case, as highlighted by Duncan Clark today on this site: The Mail recently made a big deal about the costs of renewable energy policies on household bills but inflated the true figure by more than 100% due to an almost laughable number of deliberate or accidental errors in their calculations. [...]

  8. Penny Dunbabin says:

    Christalla,

    Thank you for this excellent note.

    Some of the Government’s policies, such as CERT and Warm Front, save fuel for householders. Warm Front is directed exclusively at low income householders and CERT has 40% of its benefits directed to elderly or low income householders, with 15% directed at the very poorest in society. Measures include insulation and replacements for very inefficient boilers. These have the effect of reducing fuel demand.

    • ian greenwood says:

      THE AVERAGE HOUSEHOLDER IS STILL NOT GETTING (ALMOST ANY) BENEFIT –

      NOR THE DIY-ER.

      GIVEN THE RISING COSTS OF ENERGY ALL ROUND AND WITH CHINA AND INDIA KICKING IN WOULD IT NOT BE GOOD TO GO A LOT FASTER SO EVERYONE GETS THE BENEFIT OF SOLID WALL SUPER-INSULATION?

      i SUGGEST MAKING TRISO SUPER 10 BY actis (STILL THE BEST) OR SIMILAR AVAILABLE AT £20.00 PER 20 SQ METRE ROLL TO ENABLE CAREFULLY DETAILED EXTERIOR CLADDING AT LEAST ON THE SIDES AND REAR OF “SEMIS” – (MAYBE PLANNING PERMISSION REQUIRED FOR THE FRONTS OF BRICK HOUSES)

      WHY NOT ask for EVERY TOWN AN ECO TOWN DOCUMENT EXPLAINING THIS SIMPLY BY EMAILING IAN.GREENWOOD@PHONECOOP.COOP

  9. Syed Ahmed says:

    Thanks for this article Christalla.
    The industry’s own calculations (NERA’s paper for Energy UK – posted at http://www.energy-uk.org.uk/files/NERA_report_June_2011.pdf) provides a very helpful breakdown of the cost elements of gas and electricity bills and indicates that non-EUETS environmental policy (CERT/CESP/ROC) annual costs come to around £60 which tallies with the £67 figure you mention above. It would be helpful to understand how the 8% figure associated with the EUETS is calculated. I hope the updated assessment that DECC is to publish later this year can explain this. The assessment should also provide a commentary on what the anticipated range of environmental policy related costs will be in 2020 – ie including ‘guesstimates’ related to ECO, achievement of the 2020 renewable energy targets, EUETS PIII etc.
    http://www.energyforlondon.org

  10. Alban Thurston says:

    Fine clarification, for which many thanks, Ms Kyriacou. One question: Which press titles published the mistaken analysis? I’d love to share your correct analysis with Paul Dacre, James Delingpole, etc

  11. Bob Ward says:

    This is very helpful. Would it be possible to cast some light on two other issues that are creating confusion?

    First, Ofgem publishes two different estimates for typical household fuel bills. You have referred to the figures contained in the ‘Updated: Household energy bills explained’ (http://www.ofgem.gov.uk/Media/FactSheets/Documents1/updatedhouseholdbillsjan11.pdf), which indicates that the average annual electricity bill is £424 and the average annual gas bill is £608, for respectively 3,300 kWh and 16,500 kWh of consumption. If you sum these, as you have done, the average annual dual fuel bill is £1032.

    However, Ofgem also publishes its ‘Electricity and Gas Supply Market Report’ (http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/Supply_Market_Report_March2011.pdf) which indicates that the average annual electricity bill is £535 and the average annual gas bill is £665, for respectively 4MWh/yr and 16.9MWh/yr of consumption. When these are summed, the average annual dual fuel bill is £1170.

    Which is correct, and if both are technically correct, wouldn’t it be less confusing if only one average was used?

    Second, the breakdown of fuel bills published by Ofgem excludes the costs of the EU ETS from environmental costs and instead includes them within the wholesale costs. Would it not be less confusing if the costs of the EU ETS were included within the environmental costs?

    • Dear Bob
      we’ve referred your query to Ofgem as they’re best placed to answer your questions.
      Kind regards

      • On the different bill figures: in our household bills fact sheet we produced pie charts for both the gas and electricity bills separately so customers could see the breakdown for each.
        At the time we published the fact sheet (Jan 2011) the average gas bill for a standard direct debit account (i.e. not an online direct debit deal) was £608. The equivalent for electricity was £424. Direct comparability with the average bills in our March Supply Market Report is limited because:

        • There were some retail price rises between January and March, putting up the average customer bill;
        • The Supply Market Report’s average customer bill captures standard credit and prepayment meter tariffs as well, not just direct debit, and
        • The Supply Market Report uses higher consumption figures than the factsheet.

        We have been publishing the Supply Market Report for more than 2 years and the analysis for household bills has always been based on the same consumption figures – we continue to use these figures for consistency so that customers can compare our Supply Market Reports over time.

        On the question of the EU ETS costs: the EU ETS is a European-wide permit trading scheme, and it is therefore not a UK Government environmental programme such as the CERT, CESP or RO – which we do include as environmental costs in the bill breakdowns. Generators also reflect the cost of the ETS directly in the wholesale electricity price. The cost the generator faces for the ETS varies continually for a number of reasons (e.g. the price of the carbon permit itself) and is difficult to estimate exactly at any particular time.

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