Green Levies and Energy Bills

On Thursday 5 December George Osborne will deliver his Autumn Statement to the House of Commons, setting out the state of UK finances and detailing new economic policy. One issue that the Chancellor is expected to talk about is green levies on energy bills.

Energy bills have recently been a focus of party politics. On 24 September 2013, Ed Miliband said he would freeze energy bills for 20 months if Labour won the general election. His proposals chimed with calls from consumer organisations but were criticised by some energy companies who warned that prices freezes would deter the investment required to meet future energy needs. A month later the Prime Minister announced a ‘competition test’ to establish how the energy market might be improved so that bills would be reduced. Following this, a series of policy proposals have been discussed in the press and announced by Government.

The average standard electricity bill increased by £190 from 2004 to 2012 and the average for gas has increased by £460 since 2001. In October 2012 Consumer Focus launched a campaign advising consumers to search for and switch to better energy tariffs. The campaign came on the back of research indicating that that 27% of consumers, around six million households across England, planned to cut back on their heating because of worries about energy costs. The Government has estimated that those in fuel poverty would need an average of £448 more per year in order to heat their homes properly.

The Energy Challenge

The energy sector faces conflicting pressures. Firstly consumers have grown accustomed to cheap energy and households are struggling with price increases. Under the Government’s new definition of fuel poverty 2.39 million households were fuel poor in England in 2011. Secondly the UK faces a challenge in delivering its future energy needs. The Department for Energy and Climate Change (DECC) has estimated that electricity demand will increase by between 30 and 100 percent by 2050.  Thirdly, under the Climate Change Act 2008, the UK is committed to reducing its greenhouse gas emissions by at least 80% by 2050.

In short, energy must become low carbon, while remaining affordable to consumers and attractive to investment. Some balancing of these issues will inevitably shape any announcement the Chancellor makes on Thursday.

Green Levies

Various policies have been introduced to drive the low carbon objective, many of which, directly or indirectly, have an impact on energy bills. They include measures to reduce greenhouse gas emissions, incentives to deliver low carbon energy sources and mechanisms to deliver funding for energy efficiency schemes. Some, like the Energy Company Obligation (ECO), apply a ‘levy’ directly to bills. Others, like the EU Emissions Trading Scheme (EU ETS), add to bills by increasing the cost of generating electricity by burning fossil fuels.

DECC estimated the costs of these social and environmental levies at 9% of energy bills, although there is also an expectation that in the longer term some of these measure will help to reduce energy bills. Energy efficiency measures, for example, should help people use less energy and help reduce fuel poverty.

More information on energy bills can be found in two House of Commons Library notes: Components of an Energy Bill and Energy Prices.

Author: Ed White