The Rising Trend of UK Industrial Electricity Prices

  • Date: 02/04/17
  • Dr John Constable: GWPF Energy Editor

The emerging trend in UK electricity prices to industry confirms civil service advice to Mr Blair, which he ignored, that the EU Renewables Directive (2009) would disadvantage the UK relative to other members of the European Union. If the Industrial Strategy is to succeed, the Renewables Directive will have to be repealed, post-Brexit, and immediate steps should be taken to resile from its commitments.

In 2007 the UK government department responsible for energy policy, the Department of Business Enterprise and Regulatory Reform (BERR), prepared a short paper to inform ministers of the likely impacts of the proposed European Union Renewable Energy Directive. This document was leaked to the Guardian, and is still available online from that source.

BERR’s study reported that the EU Commission itself estimated the total annual cost of the Renewable Energy Directive target at 24 billion euros in 2020 (See Table 4). BERR thought this was an underestimate, but also estimated the costs to the UK at some £6–10 billion per year (See Table 3, but note that the table unfortunately gets the figures for a 14% and a 15% target the wrong way round).

In other words, in 2007 the UK government estimated that the UK alone would bear between 25% and 40% of the total EU-wide cost of the Renewables Directive targets, a share disproportionate to its population and the size of its economy.

This obviously unreasonable burden resulted from the fact that the UK, unlike other European states such as Germany and Denmark, had only recently introduced substantial renewables subsidy programmes (the prudent and modest Non-Fossil Fuel Obligation was succeeded by the extremely generous Renewables Obligation in 2002). Consequently, the country started from a low base of renewable energy and had no renewables industry. Instead, it had switched heavily towards natural gas for both heating and electricity, a move which of course rendered both sectors much lower emitters of carbon dioxide than they would otherwise have been and at very low cost. In other words, the proposed Renewables Directive seemed almost purpose-built to punish the UK for choosing the most economic route towards a low emitting energy system, namely natural gas, and to hobble the country in comparison to those EU states which had chosen to adopt renewables.

Nevertheless, in spite of BERR’s warning, Mr Blair, then Prime Minister, committed the United Kingdom to the Directive target, which became law in 2009 and requires that the UK obtain 15% of its Final Energy Consumption from renewables, across all sectors, electricity, transport and heating. No subsequent government has shown any sign of retreating from this obligation.

However, when the EU Renewables Directive is transubstantiated into British law by the Great Repeal Act, it should be high on Mrs May’s list for subsequent deletion since it is not only bad in itself but, exactly as predicted by the civil service in 2007, puts the UK at a considerable disadvantage as compared to the member states of the European Union.

Anyone doubting this need only look at the recently released estimates of industrial electricity prices as compared with major competitors. The following figure, drawn from data published by the Department of Business Energy and Industrial Strategy (BEIS), charts electricity prices from 2005 to 2015, with and without taxes, for six members of the European Union, Denmark, France, Germany, Italy, Spain, and the United Kingdom (red line).

ukeuelecprices3

Figure 1: Industrial electricity prices (p/kWh) without taxes (left panel) and with taxes (right panel) for Denmark, France, Germany, Italy, Spain, and the United Kingdom (red line). Source: Drawn by the author from data published by BEIS.

The UK imposes electricity policy costs through levies prior to taxation, so it is unsurprising that it has the highest prices without taxes, but it is still in joint third position when those taxes are included. Bad though that position is, it is the trend over the last decade that gives the most cause for anxiety. Only the UK in this group (and indeed in the EU 15) has a consistent rising trend in electricity prices, and all the other countries have a falling trend. There are doubtless a number of causes behind this fact, but what BERR identified in 2007 as the disproportionate burden placed on the United Kingdom by the Renewables Directive target is a substantial part of the explanation.

Due to the provision of coerced market share and generous subsidies, the UK generated about 82.8 TWh of electrical energy from renewables in 2016, up from about 25 TWh in 2009 [See BEIS, Energy Trends, table 6.1. This is not far short of the approximately 100 TWh per year (about 1/3 of demand) required of the electricity sector by the National Renewable Energy Action Plan (NREAP) which sets out the means to reach the Directive target. As is well known, this growth has been dearly bought, with subsidies currently amounting to about £5 billion a year, and accounting for a significant fraction of the retail price to all consumers. Indeed, in the last release of the now discontinued Estimated Impacts of Energy and Climate Policies on Prices and Bills the Department of Energy and Climate Change (DECC) calculated that the price of electricity to a medium sized business in 2014 was 39% higher than it would have been in the absence of polices.

We can conclude, therefore, that BERR’s 2007 analysis was sound. The EU Renewables Directive (2009) has indeed put industries operating in the United Kingdom at a significant disadvantage as compared to those operating in other EU countries.

In fact, the same dataset from BEIS shows that this disadvantage is evident at a global level. The following figure compares electricity prices with and without taxes in the United Kingdom, Canada, Japan, Poland, Turkey, and the United States:

ukrowelecprices

Figure 2: Figure 1: Industrial electricity prices (p/kWh) without taxes (left panel) and with taxes (right panel) for Canada, Japan, Poland, Turkey, the United States, and the United Kingdom (red line). Source: Drawn by the author from data published by BEIS.

As with Figure 1, while the rankings in 2015 are important it is the trend that deserves close attention. The UK alone has consistently rising prices over the period. Even in Japan, where there are of course very special circumstances, prices are starting to fall, and the rising trend in US prices is both modest in itself and arguably unlikely to continue under the current president’s America First agenda.

Mr Blair made a strategic error by neglecting BERR’s warning about the Renewables Directive. It is not too late to correct that mistake, and the delivery of an “Industrial Strategy” in the context of Brexit provides the framework and the opportunity. However, two years is too long to wait; government would be well advised to take steps to immediately reduce the iniquitous effects of the Renewables Directive before any further harm is done.