Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government
Issue link: https://fhpublishing.uberflip.com/i/680922
28 | 20TH - 26TH MAY 2016 | UTILITY WEEK Customers Market view T he big six's announcements, earlier this year, of cuts to their standard gas tariff were repeatedly met by one ques- tion from political and media observers: why were the same cuts not being applied to elec- tricity? Wholesale electricity costs had fallen markedly over the previous 12 months, so the stubborn refusal of the major suppliers to lower their prices could only be evidence that competition in the energy market was not functioning as it should. We argued at the time that at least part of the explanation for the divergence between electricity and gas bills rested on the rising cost of the government's policy schemes. While wholesale costs had indeed been falling, the cost of programmes aimed at supporting the UK's low-carbon transition – which are loaded on to electricity rather than gas bills – had shied notably in the other direction. This meant that, year on year, the level of the external costs faced by electricity suppliers was essentially stable. This upward trajectory in the cost of the government's renewables policies – that is, the Renewables Obligation (RO), the small- scale feed-in tariff (FIT), and contracts for difference (CfD) – will continue through to the end of the decade. Moreover, from 2017/18, consumers' bills will be subject to the added pressure of the capacity market mechanism, which the government recently announced would be brought forward by a year to ease concerns about tightening elec- tricity margins. Overall, we believe that the unit cost charged to consumers of these four policies will increase by 124 per cent between 2015/16 and 2020/21, from 1.51p/kWh to 3.38p/kWh. This is a notable increase, and one that is exacerbated by the government's decision to exempt energy-intensive users from the costs of the RO and FIT. Announced at the Autumn Statement last year, the move, along with the exemption from CfD costs that had already been announced, will increase the cost of these policies for other users by around 7 per cent from 2017/18. These figures underline the challenges faced by a Conservative government, which has sought to place a renewed focus on affordability in the UK's low-carbon transi- tion. In one respect, it had little choice: cost control measures for the RO and the small- scale FIT schemes, announced last July, followed OBR analysis that suggested that Levy Control Framework (LCF) spending in 2020/21 could otherwise reach £9.1 billion (in 2012 prices) – £1.5 billion over the budget allocated for that year. This, the Department of Energy and cli- mate Change (Decc) said in a familiar (or perhaps slightly tiresome) refrain, risked placing an undue burden on "hard-working families and businesses". Much debate followed about the merits or otherwise of the particular policy choices made by Decc – and, in particular, its deci- sion to remove support for the lowest cost technologies in the belief that these indus- tries could now survive without subsidies. But our latest analysis does at least suggest that the measures implemented over the past year have had a notable impact on antici- pated renewables spending. We estimate that the cost of the three renewables schemes covered by the LCF envelope will reach £7.7 billion by 2020/21, only narrowly higher than the government's spending cap. Over half of this cost is attrib- utable to the RO, but the main driver of the increase over the next five years will be the CfD. By the end of the decade, the scheme will cost around £2.1 billion, though it should be noted that most of these subsidies will be paid to the eight projects successful in the government's final investment deci- sion enabling programme – held ahead of the first CfD auction in 2015. Given the apparent success of the CfD in lowering the strike prices offered to various technologies, one wonders whether Decc now regrets awarding such a substantial proportion of its low-carbon budget in a non- competitive process. Also noteworthy is that the rise in LCF costs before the end of the decade is effec- tively front-loaded, as the last new projects are commissioned under the RO – which will finally close in 2017 – and the first CfD schemes come online. This will mean that, even as Decc's measures to cut spending on these schemes take effect, the depart- ment will remain slightly over its low-carbon budget in every year, and by as much as £600 million in 2017/18. Forecasting policy costs is laden with challenges and a number of factors could yet shi our expectations. A rebound in whole- sale power prices would lower the level of top-up payments required under the CfD. Projects could be delayed and not arrive as scheduled. Most obviously, the weather will play a major role in determining the output from power stations and therefore the level of payments under the schemes. But, in any event, it is clear the cuts implemented by the government over the past 12 months will not prevent policy costs from acting as a signifi- cant upward pressure on consumers' energy bills over the next few years. Andrew Mower, editor, Cornwall Energy The cost of policy decisions From renewables support to capacity incentives, government policies are putting a surcharge on electricity prices – and this charge is set to rise until the end of the decade. By Andrew Mower. FORECAST LCF COSTS TO 2020/21 £ billion (2011/12 prices) 2015/16 2016/17 2017/18 2019/19 2019/20 2020/21 Renewables Obligation Microgeneration FITs CfD FITs LCF agreed target LCF target plus contingency Source: Cornwall Energy forecasts of individual scheme costs, Decc LCF total costs. 10 9 8 7 6 5 4 3 2 1 0