Response to Greenpeace

July 05, 2013 4:04 PM

Greenpeace has attacked the calculations underlying our website and the Daily Mail report on our new campaign.

They have two key objections: first that we have assumed a similar rise in gas bills to the rise in electricity bills projected by Liberum Capital; second that the Liberum Capital report is based on high estimates of the cost for investment required in the electricity sector.

I find it implausible that taxes on domestic electricity will rise dramatically relative to taxes on domestic gas. If we start from the premise that the Government is serious about its policies working out and meeting their emissions and renewable energy targets, which is the whole point of the campaign, then they need to get as close as possible to a single tax on emissions, whatever the source.

Allowing a 29% rise in electricity prices by 2020 (all of it the result of higher taxes) and a 100% rise in electricity prices by 2020, without any increase in gas prices, would have to create enormous distortions. I think Ministers need a substantial rise in gas prices if they are going to avoid creating all kinds of unfortunate incentives and unintended consequences by imposing radically different effective carbon prices on different components of a typical family’s energy costs.

They may simply hope that rising gas prices will deal with the problem. The scale of the shale gas revolution calls that assumption into question. If the development of shale can reduce prices in the United States then it can do the same in Europe’s smaller gas market. But maybe they will get lucky and gas prices will rise without assistance. Regardless of how it happens, my contention is that for their policy to add up they need a rise in gas prices similar to that expected for electricity prices.

To put it in simpler terms, we are projecting that the Government will continue to do roughly what they have done so far. Energy taxes currently make up 16% of a typical electricity bill and 11% of a typical gas bill. There is a difference but they are in the same ballpark. Greenpeace thinks that the Government will change policy from increasing taxes on gas and electricity by a similar amount to only increasing taxes on electricity.

Maybe that will happen. These are projections and very far from an exact science given that many of the policies are only set a few years in advance. If there were no increase in gas prices, how would that affect our results?

In that case, gas bills would remain at £830 a year. If you assume no rise in gas prices – but the same 29% rise in electricity prices – then taxes double to nearly £400 by 2020. If you assume a uniform rise in electricity and gas prices – as we have at – then energy taxes roughly triple to around £600 by 2020. It is obviously an important difference and an important debate but it does not alter our central conclusion that energy taxes are set to rise dramatically over the rest of this decade.

In terms of total bills we are talking about the difference between £1,650 in 2020 and £1,880 in 2020. To call our judgement that £1,880 is more realistic if the Government sticks to its current course scaremongering is ridiculous. Either one of those scenarios is more than scary enough. The results used in are a robust estimate showing that families already struggling with their bills are going to be hit a lot harder by rising energy taxes over the rest of this decade and beyond.

It does not make sense for me to get into the debate over the Liberum Capital electricity estimate in quite the same detail here. But the underlying numbers – in terms of the investment required – are similar to the “Ambitious Nuclear” scenario outlined by the Committee on Climate Change. Liberum Capital have drawn out the implications of those numbers instead of playing games like setting them against strong assumptions for energy saving or rising fossil fuel prices. The problem for Greenpeace is that they are – to put it lightly – not big fans of nuclear power. And the “Ambitious Renewables” scenario which avoids a big expansion of nuclear power requires a lot more investment.

If we wanted to follow the kind of path I expect Greenpeace would prefer – if energy companies put down even more wind turbines and other renewables – it would require even more investment, even more profit in the energy sector to pay for the investment and even higher prices to pay for those profits. All of the projections we have talked about so far would go out of the window and might look rather tame.

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