Energy UK says it would be “fairer” to shift policy costs onto taxpayer

October 19. PUE experts say | 4 minute read

Energy sector trade association Energy UK argued in a new report that that moving energy policy costs, especially those relating to energy efficiency, off bills and onto general taxation “would offer a fairer approach”.

Published on 13 October, the report, titled Energy in the UK, considers the past year in the sector, including the impact of COVID-19 and sets out recommendations for the energy transition.

Bills versus taxation

The trade association said policy costs from  renewables and low carbon support schemes such as the Feed-in Tariff and the Contracts for Difference are creating a financial burden for low income households and that shifting costs onto taxpayers would be fairer.

The issue of whether to put energy policy costs onto taxpayers or energy consumers is a debate that has been around for a number of years, especially in the last decade as bills have risen largely as a result of policy costs.

The amount that businesses pay for energy is affected by several different factors, including:

  • Wholesale costs – this is the amount that a supplier spends on buying electricity from generators on the wholesale market.
  • Network costs – this covers the costs of using the transmission and distribution networks, maintaining them and balancing them.
  • Supplier margins – this is how much the supplier makes versus the cost for things like staff, equipment, rent etc.
  • Renewables and low carbon support scheme costs – this includes the Renewable Obligation (low carbon support scheme), Contracts for Difference (low carbon support scheme) and Feed-in Tariff (scheme that supports small-scale renewables such as solar panels). This now also includes the Green Gas Levy, which will charge every business which uses gas, unless they exclusively use green gas.
  • Other energy policy costs – these include the Energy Company Obligation energy efficiency installation scheme, the Capacity Market energy security scheme and the Warm Home Discount fuel poverty support scheme.
  • VAT – 20% for businesses
  • Climate Change Levy – this is a tax on business energy use paid by industrial, commercial, and agricultural users, along with public services.

The Treasury is currently carrying out a Net Zero Review, which could look into the issue of bills versus taxation. The government said the review’s final report will come out in the autumn.

Findings from the report on decarbonisation and COVID-19

In 2019, the power sector decreased its emissions the most compared to other sectors for the sixth consecutive year, by 13%, Energy UK found. Since 1990, the power sector has reduced its emissions by 72%

Renewables were responsible for 37% of all generation. This compares to 33% in 2018, and only 7% a decade ago. The share of low carbon generation (this comprises both renewables and nuclear) was also up on 2018, at 54%. 2019 saw the UK run 18 consecutive days without coal on the system. This was surpassed in 2020 with 68 consecutive days of coal-free electricity generation.

Energy UK said the sector invested £12.6bn in power and gas in 2019, a slight decrease from 2018. This covers capital expenditure in new generation capacity and the upgrade and upscaling of the power and gas network infrastructure. A share of this investment translated into 3.2GW of new build in 2019.

On decarbonisation and the road to net zero, Energy UK said most of this new build generation was renewable, delivered largely through the Contracts for Difference scheme. However, the trade association highlighted that “this is below an average build rate of 5.2GW of the previous five years, and below the estimated net zero level build rates of 9-12GW per year needed to 2050”. It argues that the government needs to act to increase the rate of renewable generation deployment if we are to reach net zero by 2050.

On the impact of COVID-19, Energy UK said it had over 50 meetings with ministers raising the impact of COVID-19 on the industry and consumers between March and July. Suppliers acted to support customers by providing a significant number of payment holidays, valued at hundreds of millions of pounds, to households and businesses. Generators put their contingency plans into action which ensured key energy workers were able to work safely and keep generators and networks running.

Looking ahead

The trade association noted that the UK’s net zero target for 2050 will likely require large-scale electrification of heat and transport to decarbonise those sectors. This means that electricity demand may double by 2050 with low carbon generation set to quadruple.

Emissions from buildings account for 18% of the UK’s total emissions. Energy UK argued that the decarbonisation of buildings remains one of the main challenges in reaching net zero, but can also be an opportunity to spur a green recovery from the COVID-19 crisis. Energy UK welcomed the recently announced £2bn Green Homes Grant scheme for home retrofits. However, it said more is needed over a longer period and the government must act on the £9bn committed in the Conservative 2019 election manifesto.

Industrial emissions are another big issue for the government, with Energy UK highlighting the potential role of carbon capture technology. This technology captures carbon emissions from industrial processes that would otherwise be very difficult to decarbonise. The government announced £800mn funding for carbon capture technologies in the March Budget, but Energy UK said that “much more needs to happen now”. It called for the government to develop a hydrogen strategy and funding models for investment in strategic large-scale projects such as low carbon hydrogen and new nuclear, to deliver the lowest system costs for customers.

Energy UK put forward five broad recommendations for a successful clean energy transition:

  • A retail sector where competition and innovation flourish whilst vulnerable customers are protected.
  • An increase in private investment in net zero businesses and innovation.
  • A well-funded and centralised retrofit programme for buildings that covers energy efficiency, heat, and microgeneration.
  • A rapid decarbonisation of transport, with new incentives for EV use (by fleets and individuals).
  • A smart, flexible energy system, fit for future energy sources and user needs.

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