Some time ago Robin Guenier drew my attention to the Impact Assessment relating to the UK Climate Change Act 2008 (CCA). The detail of such documents can be both interesting and enlightening, and so it proved in the case of the CCA, since it includes this gem (S2 on page 7):
The benefits of UK action will be distributed across the globe. In the case where the UK acts in concert with other countries then the UK will benefit from other nations reduced emissions and would be expected to experience a large net benefit. Where the UK acts alone, though there would be a net benefit for the world as a whole the UK would bear all the cost of the action and would not experience any benefit from reciprocal reductions elsewhere. The economic case for the UK continuing to act alone where global action cannot be achieved would be weak.
Despite this statement being integral to the whole justification for the CCA, it seems to have been universally ignored by our politicians ever since. Global greenhouse gas emissions continue to grow, and while the UK might not be acting entirely alone in seeking to cut emissions, there does seem to be a strong argument to the effect that we in the UK are not experiencing “any benefit from reciprocal reductions elsewhere.” Thus, as the Impact Assessment states explicitly, the case for the UK continuing to act alone is weak, since global action is not being achieved (certainly not to any meaningful extent). Given the howls of anguish that have followed on from the Prime Minister’s slight backward shuffle this week, one wonders how many MPs and media pundits have read, let alone understood, the CCA Impact Assessment. In fact, do Impact Assessments serve any real purpose beyond box-ticking?
Mr Sunak’s moves with regard to net zero, however, aren’t the only recent developments with regard to energy policy that have been in the news of late. In Energy Bill I engaged in a quick analysis of the main structure of the Energy Bill currently nearing the end of its Parliamentary journey, and concluded that it’s mostly bad news for UK citizens. However, Parliamentarians presumably think otherwise, so it’s worth taking a look at the justification offered when the Bill was laid before Parliament. The section of Parliament’s website dealing with the mass of documentation relating to the Energy Bill offers up 14 separate Impact Assessment documents, so I will content myself with exploring the 36 pages of the Energy Bill Summary Impact Assessment which appeared in July 2022.
As with the hysterical response to the Prime Minister’s slight change of pace with regard to Net Zero (while apparently remaining committed to the UK achieving Net Zero by 2050) it offers a vivid insight into the delusional thinking that is daily taking place within the corridors of power. In one line on the first page it goes off the rails:
This Bill is expected to build a more secure, homegrown energy system that is cleaner and more affordable.
If only that were true. Regrettably, there remains no understanding at Westminster of the fact that these are mutually incompatible objectives.
Headline Impacts
The Impact Assessment details the headline impacts as follows:
Primary legislation in this Bill is estimated to have a net benefit to society of around £300 million, despite an annual net direct cost to business of around £9 million.
Initial illustrative estimates suggest that the secondary legislation to implement the measures in this Bill will have a significant additional net benefit to society.
For the measures where consumer bill impacts have been quantified [implying that many measures haven’t been quantified, as proves to be the case on reading further], there is estimated to be a small average annual energy bill cost of less than just £1 for dual fuel households out to 2030. However, several policies help improve system efficiencies and therefore provide consumer savings in the long run. Wider impacts on bills from other policies are uncertain and depend on future funding decisions.
That last claim comes with a footnote:
This estimate is subject to change because many of these savings will not be realised until secondary legislation stage and many policies have not quantified secondary legislation impacts yet. In addition, this estimate represents the average dual fuel household, but the final saving for consumers will depend on a) their level and pattern of energy consumption, b) their energy tariffs and c) whether they benefit from targeted measures. This will vary across households.
In other words, the secondary legislation which the Bill provides for – much of which will not be subject to any Parliamentary scrutiny at all because it is to be subject to the negative procedure – which has not yet been drafted, and which does not yet have quantified impacts, is prayed in aid for the claim that consumers will see their energy bills increase by less than £1p.a. because of the contents of the Bill. So much for rigorous assessment.
The next claim is quite staggering:
The Bill includes measures on heat network zoning and clean heat market mechanism, with estimated greenhouse gas emissions savings of around 70 MtCO2e, amounting to a social benefit of around £13 billion based on HMG’s carbon values.
This, of course, is a fantasy calculation, because in the real world “carbon” (they mean CO2) doesn’t come with a cost attached, at least not in the sense that is intended here. If the UK cuts its CO2 emissions, and the rest of the world doesn’t (as has been in significant part the case to date), it will make no financially calculable difference to anything, including the climate and climate-related costs (or benefits). It won’t make the UK better off. It won’t save us money. It won’t make a difference to my life, to your life, or to the Government’s finances. The benefits are imaginary, but the costs are real. If you want to delve into this fairy tale economics, take a look at the Government’s policy paper issued on 2nd September 2021 with the title “ Valuation of greenhouse gas emissions: for policy appraisal and evaluation”.
The three “key pillars”
So far we have looked simply at the introductory summary. By page 7 we arrive at the detail, starting with the policy rationale. It discusses the Bill’s three key pillars. The first pillar:
Leveraging investment in clean technologies to reduce emissions from industry, transport and potentially heat, and provide low carbon power when the wind is not blowing, or the sun does not shine.
The measures in the Bill in this respect represent an expensive delusional world, but not in the eyes of the author(s) of the Impact Assessment. The second pillar:
Reform our energy system and protect consumers as we strengthen energy security and minimise costs [sic].
As part of this objective, we are treated to a stunning non-sequitur:
Transitioning to a smart and flexible energy system is essential to improving energy security, reducing consumer bills, and meeting our targets for Net Zero. We are introducing smart-related measures to ensure the electrification of heat and transport can be delivered securely and at the lowest cost to consumers. And we are continuing to drive industry progress on the smart meter rollout which is set to deliver a £6 billion net benefit to society.
Do they really believe this stuff? No explanation is offered as to how and why the smart meter roll-out will deliver a £6 billion net benefit to society. However, I think I can explain where this ludicrous claim comes from. On 14th June 2023 the National Audit Office (NAO) issued an “Update on the rollout of smart meters” in which it notes the 2019 Government estimate that the rollout of smart meters over the period 2013 to 2034 (in 2011 prices) would be £13.5 billion (they also acknowledged that suppliers pass on some or all of their costs to energy consumers). At the same time the Government estimated that over that same period consumers would benefit to the extent of £6 billion because of £19.5 billion cost savings for suppliers and reduced energy use (and therefore bills) for consumers (all in 2011 prices). Yes, really. As at March 2023, the NAO report tells us, the Government estimates annual indicative savings of £56 for a typical dual fuel household with a smart meter based on the DESNZ’s (pie in the sky) estimated reductions in gas and electricity consumption. This estimate is based on the assumption that the Energy Price Guarantee is in place. Of course, without it, consumers’ bills would have been much higher, and the putative (and highly speculative) cost savings would have disappeared in a puff of smoke. If the plan is working so well, why do we also need the protection of an Energy Price Guarantee? I think it’s fair to say that the Emperor’s new clothes are more than a little threadbare.
Since I’ve digressed to take a look at the NAO report, it’s also of interest to note the finding that:
9% of…installed smart meters were not operating in smart mode as at the end of March 2023 and are effectively indistinguishable from a traditional meter, meaning that they have technical issues and do not send energy use information to suppliers and may not display this to consumers.
Also, that just:
37% of 4,655 survey respondents without smart meters, responding to a Smart Energy GB Outlook Tracker survey in November 2022…would seek or accept a smart meter in the next six months. 41% of respondents to the same survey had concerns about them.
Also:
…the smart meter rollout has been slower than government’s ambitions. Only one out of 13 large suppliers achieved both its 2022 electricity and gas smart meter installation targets. In total, these 13 suppliers installed 3.7 million meters against their combined target of nearly five million. Ofgem is currently progressing enforcement discussions with the majority of large suppliers that missed their targets in 2022. Previously, DESNZ has adjusted the expected timescale for the rollout three times and has reduced the targets over time from its initial intention to complete the rollout by 2019…
So far, then, the NAO report tells us that the roll-out of smart meters is hopelessly behind the plan, despite the roll-out period having already been extended three times; 9% of installed smart meters aren’t working properly; there is significant consumer resistance to the installation of more smart meters; the suppliers are failing to meet their annual targets and are probably going to be fined for that failure, even though it’s not their fault that consumers don’t want them and are declining to accept them. Of course, consumers will no doubt be punished by those fines being passed on to them through their energy bills.
As for the anticipated costs and benefits, they have been delayed along with the delayed roll-out. Also, it turns out that the per meter installation costs are higher than the original assessment, not least because of a shortage of installers. Despite all this, the Government persists in believing that the benefits, as well as the costs, will be higher than the original assessment. In part this is because of the Treasury’s upward revision of “carbon values”. In other words, the Government’s fantasy economics have become even more fantastic. The numbers don’t add up? Don’t worry – we’ll simply say the cost of “carbon” is higher than we originally thought, and it will all come out right.
The NAO seems to be fully signed-up to the Net Zero plan, but even its conclusion suggests that all is not well in the world of smart meters. It’s written in the language of officialdom but it seems to be code for: the benefits claimed aren’t being achieved; you don’t have any idea what the real costs and benefits are; you need to have much more information before you can decide if this is working as planned; and the figures you are relying on to bring the public with you may not be justified.
Revealingly, and rather tellingly, the NAO report also tells us (at para 2.13) that:
DESNZ sees smart meters as a critical feature of an efficient, decarbonised power system as they can encourage, or even automate, consumption patterns that are more aligned with an energy generation mix based on intermittent renewable power sources such as wind and solar.
Which of course is what a lot of the Energy Bill is about – trying to avoid an unreliable and intermittent energy system, that the Government is determined to foist on us, from falling over. This is to be achieved by forcing customers to change their lifestyles (by default if necessary) so as to use energy when it’s available rather than when it’s wanted.
And it appears (surprise, surprise!) that the Government’s cost estimate may be more than a little optimistic, since it failed to take account of additional costs incurred by suppliers in making additional home visits and communications hub replacements in the South and Central regions when the 2G and 3G networks are shut down. But DESNZ takes the view that ongoing costs and benefits associated with the enduring operation of the smart metering system beyond that considered in its 2019 appraisal of the core rollout should be considered as part of suppliers’ business-as-usual costs for securing smart metering for the future. No doubt they will also be passed on to the consumer in due course.
And, staggeringly, at para 2.22:
DESNZ has not yet set out how it will assess the costs and benefits of smart meters and its approach to rolling them out to inform decisions over the future of the rollout after 2025. DESNZ is planning a full evaluation of its approach once the rollout is complete.
Yes, really. Much of the Energy Bill is devoted to pushing the “smart energy revolution”, yet it seems the Government doesn’t know what it’s costing nor what the benefits (if any) are, and it is planning only to evaluate it fully when the rollout programme is complete. That’s a roll-out plan that is massively delayed, is encountering consumer resistance, and is more expensive than was originally intended, with a significant percentage of the smart meters installed to date failing to work as smart meters. Nevertheless, this is a key part of the “strategy” included in the Energy Bill. The Impact Assessment doesn’t mention the problems. Heaven help us.
One last throwaway comment at this stage (para 2.23):
…keeping smart meters working as intended is more complex than traditional meters as they have three different and separate components at minimum, compared with just one traditional meter. This may lead to further technical issues and increased costs as, for example, they may need to have software updates. DESNZ considers these processes and their associated costs as business-as-usual activities for suppliers. Suppliers may pass some or all of these costs to consumers.
Who knew?
Following that digression, I return to the Impact Assessment, and very briefly to the third key pillar of the Energy Bill:
Maintain the safety, security and resilience of our energy system.
At least this aspect of the legislation recognises (albeit very belatedly) that “nuclear remains an important part of the UK’s energy mix.”
Rationale for intervention
The overarching rationale for intervention is to ensure that our energy system is secure, clean and affordable. Given the large number of policies, the specific rationale for intervention varies widely across the measures in the Bill. See the impact assessments listed in annexes 1-3 for the rationale for intervention specific to each policy.
Essentially, however, the rationale also falls into three parts. First:
“Energy security – quasi-public good.” I leave you, dear reader, to see if you can understand the logic behind the supporting paragraph:
Energy security is non-excludable because once energy security is provided, it is not possible to exclude individuals from benefitting from it. This leads to a free-rider problem, whereby individuals can benefit from energy security without contributing towards its cost. In a free market, firms may not provide a socially optimal level of energy security as they have difficulty recouping the cost of doing so (given it’s not possible to exclude people from its benefits). Therefore, in the absence of government intervention, energy security is likely to be under-provided.
I should have thought that energy security was an over-riding objective in its own right, probably the pre-eminent objective that should be achieved by Government. The problem of “free-riders” is insignificant compared to that fundamental objective. And by the way – if the UK cripples itself financially with its decarbonisation efforts, while most of the rest of the world doesn’t follow suit, does it not follow that the rest of the world are “free-riders”?
Second:
“Affordable energy – equity considerations.” In this regard we are told:
The cost of energy makes up a higher proportion of total income for those on lower incomes compared to those on higher incomes. This causes equity concerns given energy is a necessity good that is needed for basic human existence, providing a rationale for government intervention.
I agree completely. That is why any government intervention should be aimed at making energy cheaper, not more expensive.
Third:
“Clean energy – greenhouse gas emissions are a negative externality.”
Here we learn that energy security isn’t the “overarching rationale behind government action.” Rather, the overarching rationale to decarbonise energy is:
…to correct the negative externalities of emissions. Government intervention is needed to address the social cost of emissions from the production of energy from unabated fossil fuels.
It is claimed that in the absence of government intervention:
…energy from unabated fossil fuel sources would be over-produced due to the private costs of their production being lower than the social costs, which include pollution costs borne by wider society.
That is a rather cryptic phrase, but I take it to constitute an admission that fossil fuels are cheap, but that if you add in social costs, they are really expensive, so the public can’t be allowed to benefit from their cheapness, because the public doesn’t understand the wider societal costs. Those costs are said to include pollution costs. They are not explained, but I would be very interested to learn if they are referring to pollution in the sense that we would all recognise (poor air quality, and the like) or whether it is a reference to the putative cost of CO2 emissions due to their global warming qualities (which the establishment loves to label as pollution). If the latter, or even if primarily the latter, then the “rationale” underpinning the legislation isn’t so much a rationale as a begging of the question.
Summary of impacts
This is dealt with at section 2 of the impact assessment. It falls into five sections.
the policies and their key impacts (section 2.1)
consumer impacts (section 2.2)
security of energy supply impacts (section 2.3)
emissions impacts (section 2.4)
small and micro business impacts (section 2.5).
Taking each in turn, and starting with the policies and their key impacts, we are told that only eight policies in the Bill have direct impacts as a result of the primary legislation. Because the secondary legislation aspect of the Energy Bill is so substantial, a further impact assessment will be necessary at secondary legislation stage, to move beyond what are currently only indicative assessments. The eight policies for which direct impacts are attributed to the primary legislation are CO2 transport and storage regulatory investment (TRI); hydrogen heating village trial (no impacts) (sic); special merger regime for energy network companies; energy industry code reform; Multi-purpose interconnectors (MPIs); defining electricity storage; final stages of nuclear decommissioning; and downstream oil resilience.
We are treated to a repeat of the dubious claim that primary legislation in the Bill is estimated to have a net benefit to society of around £300 million and an annual net direct cost to business of only around £9 million. We learn that this has been calculated using the impact assessment calculator. I have taken a quick look at it and found it to be fiendishly complicated. I didn’t understand it well enough to be able to assert with confidence that the numbers it produced are baloney, but suffice to say, I have my doubts.
There then follows a table setting out each (not just the eight) policy, with a description of what it involves, a note of its impacts, and a stab at its costs or benefits (including those “indicative assessments” for the policies where the costs and benefits will be the result of secondary, rather than primary, legislation). The tables run to over eleven pages, and are worth a look if you are interested in seeing a quick summary of the policies, how they are supposed to work, the impacts it is said they will have, and the putative costs and benefits associated with them.
Turning to consumer impacts, we are told that the figures offered “present a partial picture and are subject to change”, not least because the claimed “savings will also not be realised until secondary legislation stage and given the inherent uncertainties in their use, many policies do not have quantified secondary legislation impacts yet.”
Savings for domestic consumers are claimed under a number of heads. First it is alleged that policies designed to increase competition between network companies will reduce domestic consumer bills by….[drum-roll]…”around £2 for the average dual fuel household per year for the special merger policy and around £1 for the average dual fuel household per year for the onshore electricity competition policy”. It’s not a big claim, but even so, I will believe it when I see it.
Second, we are told that “smart energy policies help to reduce domestic consumer bills.” These claimed savings are based on an assumption that we will all reduce our energy use by 3%, as assumed back in 2019, despite the doubts expressed recently by the NAO. They also depend on “shifting electricity demand automatically to times of the day when energy is cheaper.” Let’s just say that these claims are based more on optimism than on reality.
Next, it is claimed that “policies that strengthen regulations for future energy security, decarbonisation and consumer protections may marginally increase domestic consumer bills in the short-term, but with potential consumer savings in the long run.” I’m underwhelmed by this one, as I am by the next and last claim:
Some policies are intended to directly support decarbonisation but, at this stage, are too uncertain to be able to say whether consumer energy costs would increase or decrease as a result. The deployment of low carbon hydrogen (annex 1.5) is essential to meeting decarbonisation targets and reducing reliance on fossil fuels, yet this measure could place costs on suppliers and increase consumer bills. However, this depends on the future funding mechanism that is agreed.
In other words, they haven’t a clue (but at least they’ve admitted it). It seems fair to say that the impact assessment has been made on a wing and a prayer, and there is every chance that the changes will cost domestic consumers, rather than save them, money.
Let’s look next at the impacts on non-domestic consumers, i.e. businesses, voluntary sector organisations, and public sector organisations and others. The claim is that the measures in the Bill seek to reduce the energy bills of such consumers, benefitting them in the long-run (which sounds suspiciously to me as though they may be worse off in the short-term). Indeed, we are treated to the same claims that policies designed to increase competition between network companies will reduce non-domestic consumer bills, though no attempt is made to calculate the saving. Worse, it is acknowledged that “some policies are essential to move us towards greater energy security, as well as to meet decarbonisation targets, but may increase non-domestic consumer bills, at least in the short-term” (as I suspected). Primarily, we are here talking about the deployment of low carbon hydrogen through a levy. “However, this measure is essential for the energy transition and the exact bill increase is dependent on the future funding mechanism that is yet to be agreed.” Apparently that’s all right, then.
The next section (“impacts on security of energy supply”) seriously loses the plot. The impact assessment recognises that currently, the capacity market helps to ensure security of electricity supply and the highly diverse and flexible sources of gas help to ensure security of gas supply. So far, so good. But then it runs off into wishful thinking, rather than reality. There is an over-arching claim that “this Bill will further strengthen energy security by establishing a Future System Operator and ensuring smart energy” followed by three bullet points which purport to support that assertion.
The first claim is simply that the new Future System Operator will have enhanced roles and responsibilities which will strengthen the System Operator’s ability to ensure energy security – even though it will be expected to do so with a weaker hand, with fewer sources of (decarbonised) energy on which it can rely. Next we are told that:
Smart energy policies can help strengthen energy security by shifting electricity demand to off-peak times when there is low demand on the electricity system such as overnight, or to times of high renewable electricity generation. This flexible form of charging can reduce or defer costly investment in additional electricity generation capacity and network reinforcement and help balance the electricity system. This applies to all smart energy policies in the Bill, including the smart meter rollout (annex 2.5), smart secure energy systems (annex 2.7), smart heat pumps (annex 2.8), energy smart appliances (annex 2.12) and smart electric vehicle charge points (annex 2.14).
This is nonsense. It is an attempt to coerce consumers into using energy at sub-optimum times and to use sub-optimum forms of heating (for instance for most UK homes, I remain confident that gas boilers will work more effectively and more cheaply than heat pumps). Putting the word “smart” in front of everything doesn’t make this a “smart” policy. On the contrary, we will only need these restrictions on our way of life because under the “de-carbonisation” plans that the Energy Bill seeks to support, the UK’s energy will become less secure and more unreliable. The claims made in this part of the Impact Assessment would not be out of place in Alice in Wonderland. They turn reality on its head. The same applies to the final claim:
Policies designed to incentivise the shift from gas heating to low-carbon heating will increase energy security. For example, the clean heat market mechanism policy (annex 1.6) incentivises the switch from gas and oil boilers to electric heat pumps, which consume significantly less energy for the same heat output. A reduction in gas and oil use increases energy security.
No it doesn’t. It reduces energy use, but if you have less energy available, and if that energy is largely in the hands of foreign-owned companies, is dependent on inter-connectors and undersea cables that are subject to attack by bad actors, and is in any event inherently unreliable and unpredictable, that does not increase energy security, rather the reverse.
Emissions impacts next. Here we are treated to a slightly more detailed version of the claim that saving CO2 emissions comes with a positive cash saving attached to it – nonsense, of course. I will confine myself to one example of the claims made in this section:
The clean heat market mechanism policy will save an estimated 19 MtCO2e of carbon emissions in the central deployment scenario (corresponding to an estimated benefit of £3.6bn) over the lifetime of the low-carbon heating appliances installed under the policy.
In other words, make up a number in pounds sterling for each tonne of CO2 equivalent that you hope will be saved, multiply the two numbers, and congratulate yourselves on how much money these measures will save. The problem, as I said above, is that it doesn’t involve a real financial saving at all. The only basis on which it could really do so involves an heroic number of improbable assumptions – that the UK is at risk of damage quantifiable in financial terms as a result of climate change; that such damage exceeds any financially quantifiable benefits; that this is the result of man-made CO2 emissions; that reducing the CO2 emissions of the UK makes a real difference to the climate; that the amount of that difference can be identified and quantified and valued; and that all this is true even if the rest of the world doesn’t join in. It’s nonsense.
Finally, small and micro business (SaMBs) impacts. This is a bit of a dog’s breakfast:
Of the 30 policies included in this Bill, only 4 policies are expected to result in costs for small and micro businesses (SaMBs) at primary legislation stage and 4 policies are expected to result in proportionately higher costs on SaMBs at secondary legislation stage but have no impacts at primary legislation stage…These policies have been highlighted because a) they are expected to result in costs for SaMBs at this primary legislation stage which is what the RPC are validating at this stage or b) they are expected to result in proportionately higher costs for SaMBs at secondary legislation stage which is highlighted as an important factor in the RPC small and micro business assessment guidance. The remaining 22 policies are less significant for this assessment because either a) they are not expected to result in costs or benefits to SaMBs at all (8 policies), b) it is too early to do a full assessment of the costs and benefits for SaMBs at secondary legislation stage but there are no costs or benefits at primary legislation stage (4 policies), c) they are expected to result in benefits for SaMBs at secondary legislation stage but there are no costs or benefits at primary legislation stage in most cases (3 policies), or d) they are expected to result in proportionate costs for SaMBs at secondary legislation stage but there are no costs or benefits at primary legislation stage in most cases (7 policies).
The policies that are expected to result in costs for SaMBs at primary legislation stage are: hydrogen heating village trial (possibly, for those businesses in the area); energy industry code reform (“At primary legislation stage, all businesses are expected to incur familiarisation costs of £1,200-£2,400 per business. This cost could be proportionately higher for SaMBs as they have a smaller customer base to spread these costs over”); defining electricity storage (“At primary legislation stage, all businesses are expected to incur a familiarisation cost only of around £270 per business” – but again, proportionately more for small businesses); downstream oil resilience (probably not affecting many businesses).
Policies that may result in proportionately higher costs for SaMBs at secondary legislation stage but have no impacts at primary legislation stage: future system operator; heat network zoning; heat network market framework; and smart appliances. The fact of the likely costs is noted, but they are not assessed.
There is more, for instance regarding equalities impacts, and monitoring and evaluation, but for current purposes, I have covered the main parts.
Conclusion
The Energy Bill, as becomes clear from a reading of its summary Impact Assessment, is a vitally important part of the ongoing Net Zero plan. It is almost all about moving forward the process of “decarbonisation” within the UK’s energy supply system.
It will involve lots of costs, and will render the UK’s energy system less, not more, secure. The Impact Assessment is based on a fantasy view of the world, ignores the reality of the shambles that is the smart meter roll-out, assumes that we can value and put in the bank saving from reductions in CO2 emissions (we can’t), ignores the impacts from the mass of secondary legislation set to follow on from the Act (they’re left to another Impact Assessment on another day), and blithely assumes that the Bill will save more money than it costs, and will make things better rather than worse. I am afraid that I have arrived at exactly the opposite conclusions.
Iowa Climate Science Education 