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Lynsey Jones: Green levies aren't to blame for rising energy prices

Lynsey Jones (Climate Programme Manager at CEN)

Energy bills have gone through the roof and it is likely to get worse. Come autumn, the price cap will go up again to potentially £3,300, putting 12 million more people at risk of fuel poverty. All Conservative leadership candidates must have a plan for tackling the cost of living and cutting energy bills.

The long-term solution should be to reduce our dependence on volatile fossil fuel markets and switch to our own cheap, clean renewable sources. Renewables are already helping to shield consumers from high gas prices, saving around £6.1 billion worth of gas in 2021, equivalent to £221 of gas per household.

But in the meantime, households need help paying their bills. That’s why green levies, which have, since April, cost on average £153 per household per year, become such a hot topic over the past few weeks and months.

Green levies refer to the variety of policy costs on people’s energy bills, which pay for legacy renewables projects and poverty alleviation schemes. They make up just 8% of a typical dual fuel bill and have gone down proportionally from 15% from this time last year due to the rising price of gas. Wholesale gas prices are the highest they’ve been for 15 years, up 250% since January. Under a £3,300 price cap, levies will represent just 3%. The reason for high energy bills, therefore, is not green levies, but the cost of gas and our reliance upon it.

Scrapping the funding from these levies would wreck investor confidence in the UK’s energy industry - across all energy types - and would mean having to buy out the projects under contract (or worse, illegally renege on them). Renewable projects are already supporting tens of thousands of new jobs and cutting our reliance on fossil fuels. Getting rid of the levies would jeopardise new investment and would leave us dependent on expensive gas for longer.

Most projects, especially those under the Renewables Obligation, started generating years ago when the cost of renewables was considerably higher than they are now. But the costs have come tumbling down as technology improved, and projects that are funded using the new Contracts for Difference (CfDs) scheme are even paying hundreds of millions back to energy suppliers, suppressing the rise in electricity bills.

There are also levies that fund social schemes like the Warm Home Discount and Energy Company Obligation, which provide direct support and insulation for the fuel poor. ECO4, the new fourth phase of the Energy Company Obligation, will cut household bills by around £290 on average, but for the least efficient homes this could be up to £1,600.

One option is to remove all of these levies from bills and to fund them out of general taxes, which some Conservative leadership candidates have already committed to. But this would cost the Treasury up to £7.2 billion (around £5.7 billion for renewables support schemes and £1.5 billion for ECO and the Warm Homes Discount).

A compromise solution could be to remove just the legacy renewables project costs from bills and fund them from general taxation in the short term. The Treasury could claw the money back through a levy on gas bills once energy bills go back to some kind of normal level. To provide policy certainty to investors and to let consumers benefit from cheap renewables, levies from CfDs could stay on bills.

It could take time given complex legal changes would be required, but this policy would have three key benefits: it would lower bills ahead of this winter and get rid of a perceived ‘net zero cost’; it would be a more progressive way of funding early-stage renewables deployment; and it would incentivise the uptake of lower-carbon heat pumps compared to higher-carbon gas boilers by rebalancing the prices of the two fuels.

Trying to scrap green levies completely would be extremely difficult and would hurt the households that need support the most. It may not be simple, but moving at least some of them into general taxation is the clearest way forward to help bill payers and keep us on track for net zero.


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