Renewable subsidy cuts might raise bills in the long term, but we don’t know by how much

Published: 11th Mar 2016

In brief

Claim

Changes in government energy policy since 2015 may have added £120 a year to household bills.

Conclusion

The confidence of energy investors has been shaken, according to the Energy and Climate Change Committee. If so this could raise household bills in the long term. But the specific £120 figure isn’t particularly credible.

“Changes in government energy policy since the last election have chased off investors and may have added £120 a year to household bills, according to a parliamentary report.”—the Guardian, 3 March 2016

The Energy and Climate Change Committee has said it’s concerned that recent government announcements on renewables may result in higher consumer bills in the long run. It’s worried that mixed signals to investors will mean they demand higher returns, in the form of consumer-funded subsidies.

It didn’t put a figure on this, saying that the effect would only be seen in three to five years’ time.

The figure of £120 per household is not particularly credible. It’s based on analysis which is “simplistic” and “arguably anecdotal” according to the company that produced it, which went on to argue that the government should commission more thorough research.

Investor confidence has taken a knock, according to the industry

The Committee said that investor confidence had been damaged by a number of government announcements on renewables, including the early closure of the Renewables Obligation to onshore wind, cuts to solar subsidies, and the cancellation of a £1 billion competition for carbon capture and storage technology.

It pointed to analysis by consultants at EY which said the UK had fallen to 11th in their rankings of “attractiveness” to investors in renewable energy, down from 4th a few years ago. EY said that the recent reductions in support for renewables had “baffled” investors.

The Committee said both the substance of the decisions and the way they’d been handled had damaged investor confidence.

It warned that if projects do go ahead they might be more expensive for consumers than they would have been before the government’s announcements. If investors are less confident in the return their projects will make they may demand higher subsidies to make the risk worth their while:

“We are concerned that the Government appears to be considering only short-term costs to consumers when making energy policy decisions. Increasing policy uncertainty leads to increased risk premiums, which will result in consumers paying more in the long-run.”

The impact of this was expected to become visible in three to five years, further down the project pipeline.

£120 extra in energy bills per household – based on “simplistic” analysis

The committee was told by a company called Octopus Investments that there could be an estimated £3.14 billion in additional costs for financing renewables.

The Guardian quotes the head of the Energy and Climate Intelligence Unit, a charity, as saying that if this cost were shouldered only by domestic energy consumers it “would add as much as £120 per year to the average household bill”.

It’s not clear why the £3.14 billion in estimated extra financing costs would be paid only by domestic consumers. If subsidies fed into higher prices this would also be borne by heavy industry and other companies.

And the original figure is dubious, as freely admitted by Octopus Investments. In its submission to the Committee the company said:

“We accept that the calculation of the £3.14bn cost above is a somewhat simplistic analysis based on arguably anecdotal evidence from one investor exploring an overseas market.”

This analysis involved taking a figure of £157 billion in capital that was needed by the sector, and assuming that lower investor confidence would mean investors want 2% extra in “risk premiums”.

Octopus Investments said the government should engage consultants to perform a more thorough analysis.

 


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