Sam Hall is the Director of the Conservative Environment Network.
Energy prices are rising sharply as we head into the autumn. This is causing short-term pressure on household bills, hiking the cost of living, and exacerbating fuel poverty.
The principal reason is that global gas prices have spiked, pushing up domestic prices by more than 250 per cent since the start of the year.
This is due to rising demand for gas in Asia and Europe as the global economy picks up post-Covid, and Putin’s Gazprom restricting supply through Ukraine, likely in a bid to apply pressure on Brussels to approve the Nord Stream 2 gas pipeline.
But instead of drawing the conclusion that we should urgently wean ourselves off gas, some have attempted to blame the Government’s Net Zero agenda.
Some, for instance, claim that low wind output is driving up prices. It is true that wind speeds have been lower than normal this month. Wind is intermittent, so there will be days when wind is low which will push up prices, and days when it’s high which pushes down prices.
But price impacts from variable wind output typically last days, rather than months, and do not cause chronic price rises like we’re seeing now. Indeed power prices are already falling again, precisely because wind speeds are picking up.
As an aside, due to the fact wind turbines are getting bigger, their “capacity factor” (i.e. the amount of generation relative to generating capacity) is increasing. This means that offshore wind farms coming online now will produce electricity more consistently than their predecessors – a further example of how private sector-led innovation is driving us towards Net Zero.
Some commentators have blamed the “green levies” on energy bills. Yet there are hardly any levies on gas bills (around two per cent of the bill), and they are a smaller share of people’s electricity bills (23 per cent) than the wholesale price (30 per cent).
These levies also fund crucial fuel poverty schemes, not just legacy renewables projects. Although levies are going up as new renewables and nuclear come online, this is gradual and doesn’t cause spikes like the current one.
Offshore wind strike prices are less than a quarter of what they were in 2015. The level of subsidy required by new UK offshore wind projects is minimal, potentially even negative if wholesale prices continue to grow year-on-year. Substantial future rises in these levies from the Government’s commitment to quadruple offshore wind capacity are unlikely.
Finally, others have argued that green policies blocked fracking, which would have cut gas prices. But as even fracking companies admitted back in 2013, domestic shale gas extraction wouldn’t have cut bills.
Our fracked gas would have been traded as part of a large European market, meaning there would have needed to be an implausibly large amount of new UK gas to disrupt the balance of supply and demand in Europe enough to push down prices here.
So if Net Zero isn’t to blame, how should the Government respond? One idea gaining traction is to take environmental levies off people’s bills. Although the levies aren’t the cause of the price spike, removing them would offer some relief to consumers by delivering an immediate cut to their electricity bills in particular.
Since they are underpinned by legally-binding contracts with energy generators, the levies must be funded by other means. The Treasury could temporarily fund them out of general taxation.
But since this would be expensive, once gas prices have fallen, the Treasury could introduce a small carbon charge on gas bills to cover the costs of the levies longer term.
Gas bills currently have no carbon price, a reduced VAT rate, and hardly any levies, despite the fact it’s now a higher carbon fuel than electricity. This creates precisely the wrong economic incentive for consumers and businesses when they are deciding what new heating system to buy.
To protect those in fuel poverty, as I argued a few months ago on this site, some of the revenue from the gas carbon charge could be recycled and given back as a carbon cheque to people in receipt of Universal Credit and other vulnerable households.
Cutting electricity prices in this way would have a range of benefits. Many of the poorest energy customers use electricity for heating. They’d face no gas carbon charge and pay lower levies, so this would reduce fuel poverty.
It would also support heat pump deployment, critical for reducing our gas dependence and reaching Net Zero, by reducing their running costs relative to gas boilers. Similarly, it would incentivise more industries to switch to lower-carbon electricity, while boosting the competitiveness of those already using electricity.
Another option that the Treasury will currently be considering is simply subsidising the energy bills of the most vulnerable households. This would deliver short-term relief and would target public funds at those most in need, but wouldn’t move us longer term away from gas.
We’d risk a repeat of this problem in a few years’ time when gas prices inevitably spike again. And if the Treasury has to issue more short-term relief, it could end up being worse for the public purse.
Longer term, the Government needs to accelerate its deployment of renewables. Renewables are cheaper than new fossil fuel generation, support tens of thousands of jobs in our industrial heartlands, and reduce our dependence on volatile gas. As well as rolling out the cheaper, more established renewables, we should scale up support for nascent renewable technologies such as floating offshore wind and geothermal.
The £9.2 billion energy efficiency fund from the Conservative manifesto should be delivered in next month’s spending review and front-loaded as much as possible. Better home insulation will mean people using less gas to keep their homes warm, delivering short-term bill savings and reducing gas demand.
And, finally, we need to reform the Capacity Market – the Government’s policy for buying reserve generation capacity to ensure security of supply – so it actually brings forward new, clean, flexible storage and generation technologies, and doesn’t just subsidise existing gas power stations. This would also make us less reliant on volatile gas as a back-up for wind.
This is a worrying time for billpayers and lays bare the cost of our gas dependency. The Government should act now to relieve some of the pressure on people’s cost of living at the same time as driving forward its Net Zero agenda. The two go hand in hand.