Further to my piece earlier in the week arguing for the Government to ensure it goes into the next election having delivered lower food costs, today we consider another aspect of the cost of living: energy bills.
The amount households pay for energy has been a political battleground for years now. That’s no surprise – as the IEA points out, “over the last 16 years electricity costs for households in England and Wales have increased by 50 per cent in real terms”.
Politicians have understandably sought to address people’s frustrations and capitalise on the electoral potential. Ed Miliband famously stunned the Coalition by pledging to freeze prices. Very unwisely, the Conservative Party followed him in the recent election with a pledge that looked and sounded the same, but – ministers protested – wasn’t. Not only was it a bad idea, but attempting to out-socialist Jeremy Corbyn was never going to work – of course, he one-upped Theresa May by promising to nationalise parts of the energy industry.
These supposed solutions are a blind alley, and neglect other, more conservative, approaches which could make a real and very welcome difference to the burdens on all those who have bills to pay.
Brexit opens some new doors. After leaving the EU, we would regain the freedom to choose the level of VAT paid on household energy bills. Currently the rate stands at the minimum allowed, five per cent, and has done since Labour reduced it to that level in 1997. During last year’s referendum campaign, Vote Leave calculated that removing this five per cent tax entirely from domestic energy bills would save consumers £1.7 billion – a calculation founded in ONS and Treasury figures, and notably not disputed by the pro-EU campaign at the time. That could be an instant and tangible benefit of Brexit.
VAT is a direct tax on top of existing energy costs. There are, however, opportunities to reform more fundamental policies that influence the price we pay for our lighting and heating.
We should note at this point that those determined to paint the most doom-laden possible picture of a future outside the EU inevitably include energy in their nightmarish visions. We are told that the EU will shut down pipelines and turn off electricity interconnections, starving us of power. That doesn’t paint Brussels in a very pleasant light, but it’s also inaccurate. For a start, as the University of Cambridge’s Energy Policy Group – not a body that is Panglossian about Brexit – notes,
“…it is difficult to see how UK will lose much at least in terms of energy, even from a hard Brexit. Of course, it is possible that a small limitation on net imports of electricity from France and the Netherlands will raise prices in the UK more than proportionally. However imports are only 6% of electricity supply. Limitations on the substantial re-exports of gas (arriving in the UK by ship or pipeline) to the EU, would lower prices in the UK.”
In other words, even if the EU was to totally disregard the mutual benefits of trade in energy and block imports and exports of it with the UK, such a scenario would be unlikely to have any serious impact on prices paid by UK consumers.
Similarly, a study by Oxera, an economics consultancy, found even the application of tariffs on energy would increase average bills by £2 a year, which is a small fraction of the amount a VAT cut, or other policy measures discussed below, would reduce bills by. This country won’t be staying in the EU’s energy market structures, both because they require supremacy of EU law and, in Switzerland’s case, the EU demands free movement of people as a condition of membership – so tariffs could apply, in the scenario that there’s no Free Trade Agreement. But predictions that this particular aspect of Brexit will bring disaster appear to be simply untrue.
By comparison, leaving the EU will offer the chance to leave behind a range of poorly-conceived and costly EU policies that drive up the cost of energy in this country.
Take, for example, EU renewables targets. As Matthew Sinclair argued in a paper for the IEA last year,
“Twenty per cent of final energy consumption in the EU as a whole must come from renewable sources by 2020. The targets for individual member states vary, and the UK target is the most ambitious.
Onshore wind has generally cost about twice as much as conventional energy, offshore wind has cost about three times as much, and solar has cost even more. That would not necessarily be a lasting problem if we were willing to be patient. Over time, those technologies might become more affordable…
However, we are trying to push prohibitively expensive technologies into action now, using the lure of extravagant subsidies to secure private investment. Over £200 billion of investment is needed in the UK energy sector by 2030 in addition to the around £150 billion that would be needed to maintain supply without the decarbonisation targets. The implications are obvious: profits have to rise so investors can make a return on that enormous investment, and prices then have to rise to pay for those profits.”
British Government policy is not blameless for the costs that have been involved so far in the subsidised shift to costly renewable technologies. Westminster hasn’t always chosen the technologies in question wisely, and Whitehall certainly haven’t always designed the subsidies very well.
But the core problem – not just a sizeable shift to more expensive energy sources, but a sizeable shift carried out in a mad dash – is a requirement of EU membership. After Brexit, we will be free to reconsider firstly whether to do so, and if so, then how to go about it without placing such vast extra burdens on consumers. And the amounts are vast: by 2020, it’s estimated that consumers will be paying an extra £7.6 billion a year in renewables subsidies. Even if we kept the requirements of the deeply unwise Climate Change Act – which are more stringent in their eventual goal even than EU rules – “exit may give the Government more scope in the way it meets climate targets”, in the words of the House of Commons Library.
The EU’s Emissions Trading Scheme is another policy which has proved both ineffective and expensive – and which we will be leaving. As far back as 2006, the flaws in the ETS were identifiable to Open Europe, who found that “the scheme has effectively just functioned as a tax on power stations (which have then been handed on to consumers in the form of higher energy prices)”. By 2014, the LSE was able to produce a history of the economic studies confirming that some of the costs of the ETS were passed through directly to the general population in their electricity bills – even to the extent of producing “a transfer of income with a few emissions-intensive producers making profits at the expense of consumers”, an obvious and outrageous injustice. It also has knock-on effects in the wider economy. In the words of one manufacturing industry body, it acts as “a choke on growth” based on “perverse incentives”, as one and, as Sinclair found, risks increasing volatility in energy prices – volatility which can, of course, go up as well as down.
These are just three examples of opportunities to reduce energy bills before the next election. There are others; Open Europe’s over-arching estimate is that “by 2020, EU-related regulations or targets will increase annual household bills by £149”. Some of those regulations we might choose to keep as they are. Others – like the £11-billion Smart Meter programme – we might wish to ditch, or finesse to our own needs, or at the very least take an opportunity to reduce the gold-plating routinely attached by Whitehall. They should all be gone through with a fine-tooth comb, to identify every viable way to deliver concrete savings to consumers.