Utility Week

UTILITY WEEK | 19TH - 25TH JULY 2019 | 11 Utility of the Future: climate change early costs of carbon capture and storage) should be paid by electricity consumers, but common sense can be dangerous for your wealth. A standard principle of public finance states that taxes should not distort the cost of inputs used by firms away from their (true) marginal costs – VAT is an effi- cient tax design because it can be reclaimed and is only really "paid" by final consumers. This means that while it can be appropri- ate for individual customers to pay electricity prices that recover the extra cost of renew- able energy, prices to industrial and com- mercial customers should not include these costs. Countries like Denmark get this right – they have the highest household electric- ity prices in the EU, but their industrial and commercial prices are among the cheapest. Danish consumers pay the costs of their (expensive) renewable support programmes, but there is no attempt to recover these from business. In contrast, UK household prices are just below the EU average, but firms pay 24 per cent more than average. Firms should pay a carbon tax, and that is likely to raise a lot of revenue that could be used for low- carbon investment, but no additional levies to support the other costs of decarbonisation. Indeed, public finance principles don't even suggest that the remaining cost of renewable energy should come from indi- vidual electricity consumers. We don't expect insurance premium tax to cover the cost of treating those hurt in motor accidents – the money goes into a general pool to pay for all government spending. The costs of decar- bonisation are something for the Treasury, not for Ofgem. The principles here are efficiency – try to tax goods where demand is not too price- sensitive, so that the tax does not change people's decisions too much – and equity – try not to levy too much tax on goods that make up a high share of low-income house- holds' spending. For electricity, those princi- ples may conflict, since demand is not very price-sensitive (high tax) and it is a necessity for low-income consumers (low tax). The next chancellor will have some tough deci- sions to make. Richard Green, professor of sustainable energy business, Imperial College Business School 0.00 0.20 0 10 20 30 40 50 60 0 10 20 30 40 50 60 ENERGY PRICES BRITISH FUEL AND ELECTRICITY PRICES source: Imperial College Business School (Elexon, BEIS, ICE) WIND AND SOLAR PV COSTS source: Updated from: IRENA (2018) Renewable Power Generation Costs in 2017 EU NON-HOUSEHOLD ELECTRICITY PRICES, 2018 source: Eurostat The Utility of the Future Utility Week is running a year-long campaign to tackle the difficult question of the future of the sector. The campaign pillars include: July/August: Climate change September/October: Customers November/December: Business models and workforce Jan/February: Regulation March/April: Technology Check utilityweek.co.uk for more campaign content. 60 50 40 30 20 10 0 0.40 0.35 0.30 0.25 0.20 0.15 0.13 0.05 0.00 0.20 0.18 0.16 0.14 0.12 0.10 0.08 0.06 0.04 0.02 0.00 €/kWh £/MWh 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 2020 2020 £/tonne 0 Finland Czech Sweden Denmark Netherlands Hungary Bulgaria Luxembourg Romania Slovenia Poland France Lithuania Estonia Austria Croatia Latvia Greece Spain Belgium Portugal Slovakia Ireland Malta UK Italy Germany Cyprus 100 200 300 400 500 600 700 800 Global capacity (GW) Fuel prices are for the amount needed per megawatt-hour of electricity output at typical efficiency levels Electricity Coal + CO2 Gas + CO2 Cumulative worldwide deployment and the average cost of new products Levelised cost of electricity ($/kWh) £/tonne: GB CO2 EU CO2 Solar PV (auction results) Onshore wind (auction results) 2009/Q1 2012/Q1 2015/Q1 2018/Q1 2010/Q3 2013/Q3 2016/Q3 60 50 40 30 20 10 0

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