This afternoon the Government published an Electricity Market Reform White Paper. It includes a number of measures including guaranteeing electricity prices for some low carbon suppliers and a floor under the carbon price as announced in Budget 2011. They claim it will reduce energy prices, though only after some time and from the high levels driven by existing policy, but that claim is not credible.
Matthew Sinclair, Director of the TaxPayers’ Alliance and author of the upcoming book Let them eat carbon, said:
“It is extremely disappointing that the government are continuing to pile on new regulations that will add even more to families’ bills and put more manufacturing workers out of a job. The idea these reforms will cut bills, even from the incredible levels expected under existing policies, is a farce when the renewable energy sources they are trying to encourage are so expensive and nuclear power will still be too risky for most investors with the massive financial risks in constructing them. Some companies with well connected lobbyists will enjoy windfall profits, while everyone else will pay the price for Chris Huhne’s decision to offer new subsidies and guarantees, locking in higher and higher prices, instead of reforming energy policy to make it affordable.”
There are a few reasons:
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- As the TPA briefing on Budget 2011 set out, carbon and electricity price guarantees will not reduce prices if they cannot encourage the deployment of lower cost sources of energy. Renewable energy relies on other expensive and guaranteed subsidies already. Investors are still wary of nuclear power because of the huge financial risks in constructing new plants.
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- This policy transfers risk to families. While energy companies won't lose out if energy prices crash, as they have a guarantee in the form of a "contract for difference", that would means consumers or taxpayers have to pick up the bill. The Government is betting on the underlying cost of energy rising dramatically which is very risky with the scale of shale gas discoveries around the world, for example.
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- The Department are far too sanguine about the ability of energy efficiency to limit the cost of meeting environmental targets. Citigroup research has set out how they will require Britain to invest more than Germany, France and Italy (or Spain) put together - €229 billion. Paying for that investment will require energy company profits to rise and, in turn, energy prices to rise substantially. They argue that will mean domestic energy bills rising by 52 per cent in real terms from their June 2010 level. Even if energy efficiency is in place that can only practically be reduced to 35 per cent and that is before you count the cost of investing in energy efficiency, which isn't free. Only by changing those targets can we seriously reduce the cost.