Comment: 7 reasons the government has failed to keep consumer energy costs low

Household energy bills are in the spotlight again ahead of the general election in May, with a recent report showing more than a million Britons in work can’t afford to heat their homes, and a drop in wholesale energy costs leading to government telling the Big Six to cut consumer’s bills.

Ed Miliband has also called for Ofgem, the energy regulator (which is already investigating the Big Six), to have powers to force energy firms to reduce their tariffs to reflect wholesale prices.

E.On took the lead yesterday by saying it will reduce its standard gas charge by 3.5% with immediate effect, while one analyst said British Gas stands to massively profit from the situation:

If British Gas fails to cut energy prices despite falling costs, its profits for 2015 could soar by 60%, analyst Lakis Athanasiou estimates.

— Emily Gosden (@emilygosden) January 12, 2015

So, to what extent could coalition Government policies contribute to high energy bills?

Paying out to big players

One of the themes of cross-party discussions on energy has been the importance of stimulating competition.

Yet in practice the coalition’s complex series of reforms to the power market have tended to reduce competition and increase Government price-setting and largesse – largely not for the new players, but for the existing power players.

There are two main mechanisms that are problematic in this respect: the capacity market and Contracts for Difference.

1) Capacity market windfall 

The capacity market has paid quite a lot of large electricity suppliers for keeping their generating stations going when that’s  what they were planning to do anyway. In particular old nuclear stations were almost certainly going to carry on as long as they could. But they’re now being paid to do so as well.

Meanwhile, coal stations are the biggest problem for the climate, and getting coal out of the power system is widely agreed to be (at least on the supply end of the power equation) the cheapest way of improving our environmental performance.

But over this parliament they have started generating much more of our power than before – despite the Government  calling for a stop to overseas coal finance at international climate talks, saying no to new coal without CCS, and enacting an Emissions Performance Standard for new coal.

The Capacity Market is now going to pay them to keep UK coal plants open, whilst the Carbon Floor Price is taxing them to close them down. Consumer lose both ways. I unusually find myself agreeing with Head of Centrica Sam Laidlaw on the ‘inherent paradox’ in this situation.

2) Contracts for Difference supporting big energy firms – and Hinkley

The Contract for Difference (CfD) support mechanism really suits big players, who can keep out the smaller players and so maintain the existing system that has been responsible for the prices we see.  There is considerable complexity, little transparency over contract allocation, and considerable risk in investing for energy development upfront – a situation where the risks are best dealt with by large players with legal and public affairs teams.

Despite setting itself against consumer subsidies for nuclear power in the Coalition Agreement, the proposed new power station at Hinkley Point will have many implicit subsidies under CfD, such as grid connection, accident insurance, and repayment risks covered by Government. Despite this, its index-linked headline cost of power will still be higher than onshore wind, and probably ground-based solar well before it gets built. If it ever does.

Failing to help citizens lower their bills

The best way for consumers of energy to lower their bills is to use less. Not by shivering in the dark but by using the gas, electricity and heating fuel more efficiently. This is not only a social good but should cut emissions too. How well have the coalition done in encouraging energy savings?

3) Green Deal ‘disappointing’

The Green Deal – the Government’s flagship project for efficiency – has been a ‘disappointing failure’ according to Commons Energy and Climate Change Committee, with poor planning, communications and implementation.

4) ECO cut

Another scheme, the only publicly funded source of energy efficiency work on homes, called ‘ECO’ was cut in a move that PM Cameron alledgedly said constituted ‘cutting the green crap’. This happened when the Government were on the back-foot politically after Ed Miliband pledged to freeze consumer energy prices.

This meant a considerable loss of momentum on efficiency installation – and so higher bills for consumers in the longer-term – and a windfall of around £245 million for energy suppliers, according to analysis by Association for the Conservation of Energy.

5) EU efficiency target blocked

The UK has also been highly obstructive in seeking agreement on a new EU wide target that would provide the certainty for a new round of efficiency gains. Much of the momentum for energy efficiency – and thus for lower bills – comes from EU targets and initiatives (don’t tell UKIP). Examples include the product standards which provide savings of over £100 on the average bill [see chart 11].

Keeping the UK system stuck in the past

Not acknowledging the economic and security threat of climate change means not thinking ahead to a new way of doing energy. The future will not look like the past. There will be cheaper and better ways of getting energy services, unless UK policy locks us into the old way of doing things.

6) Blocking wind and solar

The cheapest forms of low carbon power will soon be onshore wind and solar. Senior members of the Government are blocking wind and undermining solar, despite David Cameron hailing Britain’s renewable power success at Ban Ki Moon’s summit last year: “We’ve more than doubled our capacity in renewable electricity in the last 4 years alone. We now have enough solar to power almost a million UK homes.”

7) Decentralised energy

The coalition’s Green Investment Bank has recently announced £200m of funding for community energy schemes, but it is not fulfilling its full potential. The GIB could do a lot more if it was given fully-fledged borrowing powers or if it was expanded into a broader state investor similar to green investment structures like Germany and France.

A number of major banks are now arguing that the future will be a decentralised smart grid. UBS are the largest private bank in the world and are advising that large-scale power stations (such as the ones supported by the capacity market and nuclear CfDs) will be rendered redundant. Similar warnings about the rise of decentralised systems have come from Deutsche Bank, HSBC, Barclays and other private banks advising investors on value for money.

Dr Doug Parr is Greenpeace UK’s chief scientist