By Paul Homewood
According to the Office for Budget Responsibility, the cost of Environmental Levies and the RHI scheme, (all a consequence of the Climate Change Act), will have risen to £13.5bn by 2021/22.
All of this cost is borne by energy consumers, except for the RHI, which is taxpayer funded.
But what is likely to happen to these costs in the years after 2021/22? Dieter Helm in his recent report reckons the cumulative cost will be well over £100 billion by 2030, but this appears to be way under the mark, given the costs already identified up to 2021.
There has been an ongoing conspiracy between the Government and the Committee on Climate Change to conceal the true cost of their policies.
I have therefore now undertaken a detailed study of the real costs between now and 2030, and the results are truly horrifying.
By 2030, the annual cost of the Environmental Levies and RHI will amount to £21bn. The cumulative cost between now and 2030 will be £216bn, an average of over £15bn a year.
It is worth emphasising at this stage that Environmental Levies and RHI do not account for all of the costs associated with the Climate Change Act. For instance, the growth of renewable energy has entailed huge expense in building new transmission lines and upgrading networks. I have not included items such as these, as there are no reliable figures available for them, although they are estimated to run into tens of millions.
Billions more will inevitably be spent on decarbonising transport and heating, but again these have not been officially costed.
Before we get into detail, I will describe some of the basic methodology. (I will include a more detailed explanation in a separate post).
1) My costings are based on the same power generation scenario used by the Committee on Climate Change, when they attempted to cost their Fifth Carbon Budget in 2015.
This in turn was I believe DECC’s Central Scenario.
Below are the numbers for low carbon generation for 2030. (Note – existing nuclear is not included).
2) There are, of course, many scenarios for possible generation, and they all have their impracticalities. This one, for example, contains a large amount of CCS which now looks highly unlikely to be built.
This raises the question of how it can be replaced. It is certainly too late to replace with extra nuclear in the timescales involved, whilst more wind/solar would need to be backed up with fossil fuel standby.
Given all of the many varied scenarios, and all of the improbabilities surrounding them, I have chosen to stick with the CCC’s central scenario.
If I concocted my own one, I could be accused of making up my own figures.
3) All of my calculations of subsidies are based on official data. These include:
a) Value of ROCs.
b) Strike prices already agreed for Contracts for Difference.
c) Data and assumptions from the CCC’s Fifth Carbon Budget.
d) Projections from the OBR.
e) Capacity and generation data from BEIS.
4) All costs are at 2017 prices, in other words will not change for inflation.
5) I assume that the current wholesale price of electricity, which is £45/MWh, will remain the same throughout.
This is a crucial consideration, as the higher the market price, the smaller the subsidy for CfDs becomes.
Both the CCC and Government are projecting a large increase in the market price, which helpfully allows them to claim that the cost of subsidies will be lower. However, most of this increase is due to an ever increasing Carbon Price, and is therefore an artificial concoction, which will still have to be paid for by consumers.
I have no idea at all what will happen to energy prices in the next thirteen years. If I did, I would soon be a millionaire! But of course, nobody else does either, which is precisely why there is no other alternative but to use the current price.
I have, however, included a sensitivity analysis, so that we can see the effect on overall costs of changes in the market price of electricity.
What we can say is that wholesale electricity prices have been hovering around the £45 mark for the last 12 months, and certainly longer.
6) I have not included the Climate Change Levy, which will cost £1.9bn this year, as this is tax revenue. I have therefore assumed it would have to be replaced if it was abolished.
The same argument applies to Air Passenger Duty, which long ago became simply another revenue raising device.
7) I have included the cost of the smart meter rollout, estimated at £10bn over the next four years.
Results
- Annual costs will continue to rise till 2030. (Costs drop between 2020 and 2021 because the cost of smart meters drops out of the equation).
- Between now and 2030, the cumulative cost will have amounted to £216bn, at today’s prices.
- Amongst the largest costs by 2030 will be:
Offshore Wind – £4.9bn
New Nuclear – £2.8bn
Onshore Wind – £1.8
CCS – £3.5bn
Capacity Market – £2.4bn
Highlights
- The lower prices for offshore wind achieved in the latest auction are built into the calculations, and are also assumed to apply to new capacity built beyond 2022. However, much higher costs are already locked in for CfDs already agreed to in previous auctions. The net result is that overall offshore wind will still be costing £107/MWh at today’s prices by 2030, a subsidy of £62/MWh.
- With onshore wind again most of the capacity that is forecast for 2030, about 62%, is already locked into expensive contracts, As a result, the cost of onshore wind in 2030 will be £82/MWh.
- In addition to any existing nuclear capacity that is still around by 2030, the CCC assume that Hinkley Point C will be up and running in 2025, producing 25.5 Twh a year, at a current guaranteed strike price of £100.40/MWh. It is also assumed that Moorside will come on stream in 2027, with output of 26.4 TWh, at a slightly lower price of £97.40/TWh.
- Biomass capacity is now largely in place, and will cost £104/MWh in 2030
- CCS, if it ever actually comes on stream, is assumed by the CCC to come from a number of developments, with an average cost of £112/MWh.
Wholesale Price Sensitivity
As far as subsidies go, changes in the wholesale price of electricity predominantly affect CfD contracts, which offer a guaranteed, index linked price. The lower the market price, the higher the subsidy therefore.
As mentioned, this analysis assumes that the current price of £45/MWh applies throughout the period.
For every increase/decrease of £1/MWh, there is an effect of £198 million a year in 2030, when there is projected to be 198 TWh from CfD schemes. As there are currently very few CfD projects in production the figure this year is 10.8 TWh, and this figure progressively increases each year between now and 2030.
So, for instance, if wholesale prices are £55/MWh in 2030, the cost of subsidies would be £1.98bn less than my projections.
Reconciling To The CCC’s Calculations
The CCC have projected a total cost of subsidies in 2030 of £8.0bn at 2014 prices, relating to ROCs, CfDs and FIT (Feed in Tariff). My calculations work out at £17.1bn.
The main difference is that the CCC have forecast a wholesale price of £84.37/MWh in 2030. This results in their estimate of subsidies being £7.8bn lower than if they had used £45/MWh.
It is worth pointing out that the CCC have also projected a a rapidly rising carbon price would account for £27.52/MWh out of the £84.37. Without this, their assumed market price would be £56.85/MWh, much closer to the current level.
It is also worth noting that the CCC have assumed that gas prices rise from their current level of around 50p/therm to 70p by 2030. This is important because they use gas prices as proxy for the market price of electricity.
The other significant difference lies in their estimate of FITs, which is £991 million, for every year from 2016 to 2030. The OBR projections, which I have used, are £1.3bn in 2016/17, rising to £1.6bn in 2021/22.
Final Thoughts
Even on the CCC’s projections, the cost of climate policies will continue to rise during the 2020s from their already significant level.
Yet they have grossly underestimated the true costs by adding a bogus cost of carbon into the price of conventional electricity, thus reducing the real value of subsidies for low carbon electricity at a stroke.
On top of that, they have based their figures on a 40% rise in the price of gas, something that seems extremely unlikely in a world supposedly moving away from fossil fuels.
They may be right on this, but it seems an extraordinarily risky gamble to be taking.
Between now and 2030, on current projections, climate policies in the power sector will have cost the UK £216bn, equivalent to about £8000 per household.
Not only will this have a significant effect on electricity bills, it will also be highly damaging to the wider economy.
It is time for the Government to come clean, and admit the real costs of the Climate Change Act.
References
1) ROC details
2) Electricity generation data
3) CfD auctions
4) OBR forecasts
5) Full costings from the CCC
5th Carbon budget LCF analysis
6) My costings
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November 10, 2017 at 12:39PM
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