Energy Costs

Britain’s energy industry is about to blow a fuse. At a stroke, 15m homes are facing one of the steepest hikes to energy bills in years. Households will be faced with some of the highest energy bills ever seen in the UK. It is far from the first price hike in a market overrun by rising costs, but it is the first that cannot be blamed on energy company greed. Already billions of pounds have been wiped from shareholder portfolios. Thousands of job losses are expected to follow. Meanwhile, the influx of financially unstable energy upstarts means hundreds of thousands of homes run the risk that their supplier may join the 10 failures already recorded over the last year. This is not the energy market Whitehall had hoped to create. The price cap may be the market’s most obvious policy fracture, but the fault lines run through to the core of plans to reshape the market, according to Dieter Helm, a government adviser and academic. The entanglement of policy approaches pushing plans from renewable energy to smart meters has created a web of costs in which energy bill payers are caught, he says. “They interact, overlap and produce a myriad of unintended consequences. They drive up costs and prices. We all pay for this mass of interventions. There is no escape from the consequences of the way energy policy has been built up, sticking plaster by sticking plaster,” Helm says. “Whatever the political spin at the time, the fact is that all these costs have to be paid for. This is all part of what you are paying for and why your electricity bill keeps going up.”

Telegraph 10th Feb 2019 read more »

Advances in technology have been crushing the cost of renewables. Strike prices for offshore wind farms have tumbled from £115 per megawatt hour to less than £60 over the past four years. Gas tends to fluctuate, but the outlook here too is rosy. New supplies are opening up, from US shale to liquefied natural gas from Australia. Then there’s the decline in electricity usage – consumption sliding by 8 per cent since 2010. Shouldn’t the overall trend in UK electricity costs be down? Well, no actually. Or not, at least, if the latest cap set by the energy regulator Ofgem is anything to go by. Far from declining, the limit on the “dual fuel” bill per household (that’s gas and electricity) has just been raised by 10 per cent to £1,254 a year. Why is this happening? Well, let’s start by deconstructing that cap a bit. About £521 relates to wholesale fuel costs, mainly gas. These move up and down and have recently been rising. Fair enough, you might say. The next big chunk is network charges, which is in effect the cost of operating all the wires that carry power from generator to consumer. Then we come to so-called “policy” costs, which account for £151 – or 12.5 per cent – of that £1,254 dual-fuel bill, or near 20 per cent if you strip out gas and just look at electricity. These are the consequence of the environmental policies the government has introduced to support decarbonisation, and are tacked stealthily on to customer bills. As a recent paper from the energy economist Dieter Helm points out, that upward march will continue as more low carbon capacity comes on at relatively high fixed prices in substitution for gas and coal baseload generation. True, the latest offshore wind contracts are actually slightly below current wholesale rates. But they aren’t due to come on stream until the mid 2020s. Meanwhile, earlier pricier cohorts of legacy deals still need to be paid. There’s also the fact that the whole market has mutated. The government is increasingly the central buyer through state-backed contracts, a process that steadily ousts market-based competition. All this means prices are likely to ossify, or even go up. High prices might be fine for those with cash and a big ecological conscience; the Tesla tendency, so to speak. But it’s not so great for those getting by on rather less. Note that the £1,254 cap represents about 10 per cent of the £12,000 of disposable income taken home by the poorest fifth of households in Britain. Add on another £400 a year for water and pretty quickly you have eaten nearly a sixth of your cash just to purchase the barest essentials of life.

FT 11th Feb 2019 read more »

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Published: 11 February 2019