The government commissioned independent review of energy costs has now been published and includes proposals aimed at making the UK’s electricity system more effective and less expensive.
The report by Prof Dieter Helm claims the cost of electricity is currently higher than it needs to be to meet climate change act targets and carbon budgets.
- domestic households and businesses have not seen the full benefit of falling costs of coal, gas and renewables
- the benefits of improvements in network and supply costs from smart technologies have not been seen
- legacy costs, policies, regulation and market power are reducing cost benefits to consumers
The report does not pull its punches about government intervention in the electricity market either, saying: “The scale of the multiple interventions in the electricity market is now so great that few if any could even list them all, and their interactions are poorly understood.”
Prof Helm says complexity is itself a key factor in rising costs and calls for the government to back out of some of their current detailed roles.
Key recommendations to reduce consumer costs
Separate legacy costs of low carbon support mechanisms, such as the Renewables Obligation, Feed In Tariff’s and Contracts for Difference, should be separated and assigned to a “legacy bank” with costs billed separately to consumers. Industrial consumers should be exempt.
Set a universal carbon price for the entire UK economy, with the price able to be varied based on progress against carbon reduction targets and a “border” carbon price.
Phase out Feed in Tariff’s and low carbon Contracts for Difference. Replace them with an “equivalent firm power” capacity auction, which would mean intermittency costs would stay with those who cause them, encouraging investment in demand side, storage and back up.
Stop the review under the RIIO (Revenue = Incentives + Innovation + Outputs) for network operators as predicting technical change and costs many years ahead is impractical.
Establish a default tariff replacing the standard variable tariff, reflecting wholesale costs, fixed costs pass through, levies/taxes and a published supply margin, which could be capped.
There is also an open consultation to establish views on the proposals. Responses are due by January 5th 2018.
Government plans to keep costs low
Announcing the review, Business and Energy Secretary Greg Clark said: “Homes and business depend upon reliable, affordable power and the government is ambitious in its plans to keep costs as low as possible for them over the coming decades.
“We are already taking significant steps to upgrade our energy infrastructure as part of the Industrial Strategy and have published draft legislation to cap poor value energy tariffs helping millions of consumers across Britain. I am grateful to Professor Helm for his forensic examination. We will now carefully consider his findings.”
Energy expert analysis
The electricity cost review delivers a critical analysis of an electricity system in transition towards much lower carbon intensity. The report suggests it is overly complex, has far too many government interventions and is proving costly for consumers.
Some of the proposed remedies are interesting, such as making the costs of support for the shift towards low carbon electricity generation explicit on bills and asking bidders to a capacity market to commit to an “equivalent firm power” basis so intermittency effects are factored in. The debate around these ideas is sure to be lively and let’s hope has a positive outcome for consumers.
Alastair Fells MEI, Incorporated Eng, PG Dip Fuel Tech, BSc Hons