Gambling On The Price Of Gas…

  • Date: 13/07/16
  • Dr John Constable: GWPF Energy Editor

The UK Government has not published a detailed assessment of the effects of its energy and climate policies on electricity prices since November 2014. New work from the National Audit Office shows that falling conventional energy price projections, which increase the relative cost of renewable and nuclear subsidies, make it critical that an update is published as soon as possible.

The National Audit Office has today released a study on the state of the government’s management of the electricity industry in the United Kingdom. In spite of its title, Nuclear power in the UK, it ranges widely over the field and repays close reading even for those not particularly interested in nuclear generation.

The fact that policy intrusions into the sector should be so deep as to justify such a study by the Auditor General is in itself important and shows as plainly as one could wish that the UK’s experiment in liberal markets for energy is now a receding memory, and the age of Administrative Pricing is upon us. Sadly, we must expect many more publications from the National Audit Office on this subject.

Indeed, the study published today is essentially an orientation paper, to ground future examinations of the Department of Energy and Climate Change’s support for Hinkley Point C, nuclear power station, though it also gives valuable indications of work on other topics.

For example, the NAO also confirms the finding of the Office of Budge Responsibility that the Levy Control Framework (LCF), which limits consumer spending on renewables to £7.6bn per year in 2020, will be overspent by £1.1bn in that year. The NAO comments, perhaps with menace, that:

This is within the 20% headroom that is permissible in the Framework, but is equivalent to an additional £20 on the average [domestic] bill. We will report on the Department’s management of the Levy Control Framework later this year. (para 3.14)

One topic that the NAO should, surely, examine is the size of the “headroom”, which at 20% seems quite excessive, and indeed renders the concept of ‘control’ over spending too vague to be meaningful.

The NAO also reports DECC’s calculation that because of the fall in the wholesale electricity price the implied additional cost to consumers of the existing Contracts for Difference, which offer a guaranteed price to generators, has risen by an astonishing £5.6 billion.

Similarly, and more striking still, the NAO itself calculates that the lifetime top-up cost of the Hinkley Point nuclear CfD, i.e. the difference between the guaranteed price and the expected wholesale price, has increased from £6.1 billion when it was offered in October 2013, to a truly remarkable £29.7 billion in March this year (para 3.17).

Those who care to look back to government press releases will recall that Contracts for Difference were hailed as means of controlling the consumer burdens of policies, and that the Hinkley contract in particular represented excellent value for the consumer. Neither of these claims stands up to scrutiny. CfDs were, to put it no more strongly, wild gambles on the future price of gas for electricity generation.

No wonder, then, that DECC has discontinued its assessment of policy costs, Estimated impacts of energy and climate change policies on energy prices and bills, which has not been updated since November 2014 (see this site’s blog of 17.02.16).

The NAO itself remarks on this fact, complaining, in paragraph 1.12, that while the Department’s central scenario predicts a policy induced bill increase of £40 per year in 2020, the actual result is very uncertain, which the range running from a “reduction of £26 to an increase of £117”:

Moreover, these estimates are two years old and do not reflect recent developments, such as a fall in fossil-fuel prices, nor the future impact of smart technology, which could make the energy system more efficient.

It is entirely right to point out that there are potential upsides as well as downsides to be reported in any new issue of Estimated Impacts, but in the real world, as this study by the NAO richly shows, it is the vast and extraordinarily costly downsides that really matter. The new Secretary of State for DECC should, as a matter of priority, bring Estimated Impacts up to date. The gamble on future gas prices has failed; the public needs to know what the damage is, and where to put the blame.

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