COLUMN-Blame policy for rising UK utility bills: Kemp

by Reuters
Tuesday, 16 July 2013 12:33 GMT

By John Kemp

LONDON, July 16 (Reuters) - In a welcome attempt to help its British customers understand why power and gas bills are rising so rapidly and relentlessly, RWE's npower subsidiary has analysed the make-up of an average bill and found government policy and transmission upgrades account for almost all cost increases by 2020.

Policy and regulation will add an extra 144 pounds to the average combined gas and electricity bill by 2020 while investment in the transmission network is set to increase bills by 114 pounds, according to "Energy Explained: The Changing Cost of UK Energy" published by RWE npower on Tuesday.

Utilities' operating costs are forecast to rise just 33 pounds. Commodity costs, such as fuel and generation, are projected to fall slightly.

"The cost of funding government policies for renewable energy, social support and energy efficiency is increasing faster than any other part an energy bill," npower explains.

The share of each bill attributable to government energy policies is forecast to rise from 8 percent of the average bill in 2007 to 22 percent by 2020. By contrast, commodity costs' contribution will shrink from over half to just one-third.

"Government objectives will mean a significant rise in the cost of energy," npower warns. "These initiatives are all important - but consumers need to be aware that delivering them is causing energy costs to increase, and will continue to do so for the foreseeable future."


Pinning the responsibility for rising bills on government policy is likely to infuriate ministers and officials at the Department for Energy and Climate Change (DECC).

Ministers insist bills will be lower, not higher, in 2020 as a result of policies designed to encourage more renewable generation and reduce dependence on fossil fuels like coal and natural gas.

"Global energy prices are expected to keep rising, putting upward pressure on our energy bills," DECC wrote in a March report, "Estimated impacts of energy and climate change policies on energy prices and bills".

"This is the biggest driver in higher bills," it said. But "taken together the government's policies mean that household energy bills will be on average 11 percent, or 166 pounds, lower in 2020 than if we just sat on our hands and did nothing."

Household bills will still rise in real terms from around 1,255 pounds in 2013 to 1,331 pounds in 2020, but remain lower than the 1,496 pounds the government says they would have reached in the absence of policy measures, DECC said.


Differences between DECC and npower about what is causing bills to rise, and the impact of policy measures, stem from differing assumptions about fossil fuel prices.

DECC reckons future UK wholesale gas prices "are likely to be influenced by global oil prices which are expected to rise."

"DECC's central gas price scenario assumes a re-linking of gas to oil-indexed prices in the short-term as the gas glut erodes," though "from 2017 the linkage begins to weakens significantly."

While npower assumes the commodity costs of gas and electricity will remain roughly flat or even decline slightly by 2020, DECC is forecasting a big rise.

DECC's central scenario assumes real average oil prices increase from around $111 in 2012 to $123.50 in 2020 and $135 by 2030. It sees gas prices rising from 61 pence per therm in 2012 to almost 72 pence per therm by 2020 and levelling out thereafter ("DECC Fossil Fuel Price Projections" Oct 2012).

By assuming real fuel prices will continue to rise strongly, DECC's scenarios show major financial benefits from switching to alternatives like wind and solar as well as investing in energy conservation measures such as better home insulation.

The problem is that DECC's assumptions seem to be stuck in a time-warp. They are based on peaking oil and gas supplies and rising costs. DECC's central scenarios make no allowance for the shale boom or a structural break in oil and gas prices in the future.

DECC's price scenarios appear outdated and flawed. So far in 2012 and 2013, futures markets have put the cash price of a barrel of oil delivered in December 2019 at just $89-90, far below DECC's inflation-adjusted central scenario of $123.50 let alone it's high scenario of $150.60.

Futures prices have even been slightly below DECC's low scenario, based on assumptions about production costs.


DECC is also assuming a big reduction in the amount of gas and electricity that UK households use as a result of efficiency measures.

By 2022, the department expects around half of households to have at least one major insulation upgrade, such as loft or cavity wall insulation, which could cut annual heating bills by 25-270 pounds for each household.

Spurred by building regulations, 12 million gas-condensing boilers will be replaced by newer and more efficient ones by 2020, saving households 25-120 pounds per year.

Smart meters are supposed to be rolled out to all households by the end of 2019, which will help households make "more informed" energy decisions, though the department is silent about whether smart meters will be coupled with smart tariffs and time of use, critical peak pricing or rebates.

"Successful implementation of energy efficiency measures can more than offset the cost of policies on household energy bills on average by 2020," DECC claims, citing analysis by the government's own statutory Committee on Climate Change.


Most of the costs of greening Britain's gas and electricity system are being passed on to households as customers through their utility bills, rather than as taxpayers through explicit taxes and subsidies.

The result is that discussions about the cost of supporting renewables and energy efficiency get caught up in broader discussions about "profiteering" by the utility companies and the future cost of fossil fuels.

RWE npower claims just 16 percent of a typical consumer's combined gas and power bill is under the direct control of utility suppliers, and that average profit margins are just 5 percent.

In trying to bring greater transparency to bills, RWE's message to customers is: don't blame us for price rises which are driven by government policies.

Charging gas and electricity users for the transition to renewables and energy efficiency measures through their power bills makes sense. But there is a risk that the true costs of these policies becomes hidden and is not properly understood or scrutinised.

If RWE npower's report shines some welcome transparency on the make-up of utility bills, and prompts a discussion about the costs and benefits of various interventions in the energy market, as well as assumptions about future fuel prices, it will have made a major contribution to Britain's energy debate.

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