Are green measures really making energy bills rise?

In a time of unprecedented austerity, when the nation as a whole has been forced to tighten its belt, pinch its pennies and feel the collective squeeze (and endure countless other regurgitated journalistic metaphors), any increase in living costs are going to hit the public hard.

No wonder then, that a proliferation of stories about rising energy bills have entered the tabloids and broadsheets. Rising energy bills have rapidly become a key political battle ground in Westminster too and the escalation of said bills has formed such a large part of the national zeitgeist that newly-incumbent Energy and Climate Change Secretary, Ed Davey’s first pledge was to tackle soaring energy prices.

Yet, despite this vow, according to energy website Uswitch.com, the average dual fuel household energy bill in the UK now stands at £1,260, which is around 18 percent higher than it was in 2011.

So what’s the cause for such a rapid increase?

What the papers say

It’s a well known fact around Fleet Street that negative headlines sell more than positive ones. Yellow journalism has always been rife, but in times of national misery it tends to rear its ugly head more often than not.

The media also knows that every good story needs to inspire conversation and/or debate, and nothing does that better then a pantomime villain.

But who is the bad guy behind rising bills? Is it excessive profiteering from the Big Six, the rising cost of wholesale gas or expensive green ‘stealth taxes’?

Well, according to the mainstream press, it’s the latter, as a quick look at some of the headlines printed over the last few months demonstrates:

“Households face rising energy bills due to green taxes”

 “Green energy reforms to put £300 on household energy bills”

“Ditch climate targets or forget cheaper bills, bosses tell ministers”

“Environment policy reforms to add £300 to energy bills”

The following cartoon was published in the Daily Mail, accompanying a piece criticising the UK solar market. Last year, the Daily Mail was forced by the Press Complaints Commission to publish three corrections to pieces it ran about the cost of renewable energy policies.

For a layman, the anti-renewable subsidy viewpoint is understandable, and there are two main reasons why:

1. The majority of the public are completely unaware that Government raises funds for green initiatives through a surcharge on energy users’ bills. People don’t tend to embrace what is perceived as a ‘stealth tax’, especially when the media claim its used to deface the country’s ‘pristine countryside’ by planting millions of giant wind turbines all over our rolling hills.
 

2. Many believe that green schemes, such as feed-in tariffs, are funded by the poor and only benefit the well-off. In fact, a recent survey carried out by TNS showed that 60 percent of respondents are unsure how much UK households pay for solar energy subsidies, with only 6 percent of those surveyed correctly answering “less than £2 per year”. Over 60 percent of those surveyed admitted that they did not know to what extent a household personally subsidises solar, while another 6 percent believed that it costs “more than £100 per year” to subsidise solar technology.

So are the papers right? Is investment in renewables an expensive folly, driven by middle-class idealists designed to appease “tree-huggers and pot-smoking hippies who would prefer us to live in mud huts and communes eating organic lentils and tofu while singing folk tunes,” as the Daily Mail’s Donal Blaney’s so astutely observed?

What the Big Six say

Predictably, the vast majority of the Big Six have also climbed aboard the environmentalists’ bandwagon. The six energy suppliers, who provide bills to 99 percent of Britain’s populace, have been quick to leap to the defence of soaring energy bills.

Christine McGourty, Director of Energy UK said: “It is a complex market, made more so in recent years by the growing number of environmental obligations on the energy sector. Customers bills today are made up of far more than just the cost of the gas and electricity they use, but also an array of costs associated with the need to decarbonise our power supplies.”

While during Centrica’s 2011 financial results, the owner of British Gas stated that: “Costs of regulatory environmental initiatives amounted to £77 on the average dual fuel bill in 2011. Under current policies, these are likely to increase substantially, doubling over the next three years,” and published a graph (below) to accompany the claims.

 

Yet despite this, the tide might be turning. As customers begin to realise that the true cost of supporting out-and-out renewables is comparatively small, energy companies are being forced to tell the truth. On a full page spread in the Sunday Times, EON ran the following advert, which posed the question: “Why do energy companies make so much money at my expense?”

 

The text clearly broke down the different costs associated with energy generation and included the following, telling line: “5 percent [of running cost] was dedicated to helping the elderly and vulnerable and producing greener and more sustainable energy.” Only a twentieth of your energy bill is made up from producing greener and more sustainable energy.  

The real reason behind rising energy bills

Around 50 percent of a consumer’s energy bill is made up of the wholesale cost of gas and electricity. A report published by Ofgem, showed that the main driver behind increasing energy bills over the last few years has been the rising cost of gas. In recent years, Britain has been dragged into the volatile market of gas pricing as it has slowly fallen from a net exporter to a net importer of the fossil fuel. As an importer, Britain must attract gas by paying at levels similar to those on mainland Europe.

Around 35-50 percent of electricity in the UK is generated by burning gas; this means that half of the wholesale electricity cost is made up of the cost of the fossil-fuel used to generate it. Therefore, fluctuations in the cost of gas will significantly affect the price of electricity. Dwindling supplies of gas and the emergence of expanding Asian economies will drive the price of gas upwards over the coming years, further escalating the price the UK will have to pay to secure gas and sending bills higher.

The other half of energy bills are made up of costs associated with distribution, transmission charges, Government tax, environmental costs and meter provision on top of the energy company’s supply costs and profit level.

Ofgem estimates that network costs currently represent about a fifth of a consumer’s energy bill. The energy regulator has warned that network costs will increase over the coming years as £30 billion worth of investment is needed to replace the UK’s ageing energy infrastructure, again sending bills higher. 

‘Environmental costs’ factored into a bill can also be a bit of a red herring. Most consumers will wrongly assume that environmental costs support solely renewable energy technologies, such as solar, wind, biomass and so on. However, environmental costs also include the cost of nuclear decommissioning, the true price of which is estimated to be, on average, £266 per year for a UK household. 

Now let’s look at solar. In 2011, it cost the average UK household less than £2 to support solar subsidies – that’s 0.15 percent of the UK average dual fuel bill.

Under DECC’s new proposals, the impact of the solar FiT on an average domestic bill by the end of the year will be £5. By 2015 it will cost a UK household £8 (assuming DECC implements ‘Option C’, a proposed FiT rate of 16.5p – the highest possible cost to the consumer). By 2020 that figure will rise by just £1 to £9.     

What the solar industry should say to customers

  • Supporting solar will cost less than £10 a year for the average UK household right up until 2020
  • Gas prices (and therefore electricity prices) will continue to increase; a solar PV installation will insulate you from the rising cost of energy for several decades
  • Increased network costs over the coming years will also drive bills up to unprecedented highs, therefore investing in solar will further protect you 
  • The vast majority of Britons (89 percent) believe that is important for the UK to embrace renewable energy generation. Challenge them to generate their own energy with a solar PV array
  • The industry needs to fight and challenge the proliferation of articles/TV shows blaming environmental support for the rise in utility bills
  • Place pressure on Government to seriously consider solar technology as a key fixture in realising the country’s low-carbon ambitions, by including solar PV in its renewable energy roadmap

But remember, the installation of solar is not all about the financial benefits. A significant majority of your customers will be environmentally conscious and will consider the ethical nature of the investment as a significant benefit.