Helm delivers forensic examination of ‘too high’ UK energy costs

UK energy costs have been too high in recent years, despite falling costs of both fossil fuels and renewables, because of inexpert interventions in the market by the government in its efforts to begin the transition away from fossil fuels. This is the first main conclusion from the Cost of Energy Review carried out by Professor Dieter Helm and published on 25 October.

More difficult to summarise is the detailed strategy that Helm outlines to change this situation, but he proposes many changes to existing market arrangements, as well as separating-out into a ‘legacy bank’ the costs from the major support mechanisms for renewables, thus allowing underlying prices to be seen to be falling.

As part of deliberations into its Industrial Strategy, the government asked Helm in August to consider costs within the whole electricity supply chain of generation, transmission, distribution and supply. The government has since acted to bring in legislation to introduce energy price caps for millions of households.

The government said it will now carefully consider Helm’s review and seek the views of industry, businesses, academics and consumer groups. Business and Energy Secretary Greg Clark expressed his gratitude to Professor Helm for his ‘forensic examination’.

The cost of energy is higher than necessary to meet the Climate Change Act (CCA) emissions target and the carbon budgets, says the review. And households and businesses have not fully benefited from the falling costs of gas and coal, the rapidly falling costs of renewables, or from the efficiency gains to network and supply costs that come from smart technologies. Prices should be falling, and they should go on falling into the medium and longer terms, it adds.

Helm pulls no punches as to why – because of ‘legacy costs, policies and regulation, and the continued exercise of market power.’ Indeed: ‘the scale of multiple interventions in the electricity market is now so great that few if any could even list them all, and their interactions are poorly understood. Complexity is itself a major cause of rising costs, and tinkering with policies and regulations is unlikely to reduce costs.’

Successive interventions tend to add new costs and have unintended consequences, says the review, and the government should radically simplify interventions back out of many of its current roles.

This review then explains how this could be done. Proposed measures include:

·      Legacy costs from the Renewables Obligation Certificates (ROCs), feed-in tariffs (FiTs) and low carbon contracts for difference (CfDs) are a major contributor to rising final prices and should be separated out, ring-fenced, and placed in a ‘legacy bank’. They should be charged separately on customer bills and industrial customers should be exempt.

·      The most efficient way to meet the CCA target and carbon budgets is to set a universal carbon price on a common basis across the whole economy, harmonising the multiple carbon taxes and prices currently in place. This price would be significantly lower than the cost of the current multiple interventions.

·      FiTs and other low carbon CfDs should be gradually phased out, and merged into a unified equivalent firm power capacity auction. The costs of intermittency will then rest with those who cause them, and there will be an incentive for intermittent generators to contract with and invest in the demand side, storage and back-up plants.

·      The current RIIO (Revenue = Incentives + Innovation + Outputs) periodic review price caps for the transmission and distribution companies are already being significantly outperformed and have resulted in higher prices than need to be charged. Ofgem should consider what actions should be taken now.

·      The government should establish an independent national system operator (NSO) and regional system operators (RSOs) in the public sector, with duties to supply, and take on some of the obligations in the relevant licences from the regulated transmission and distribution companies. The NSO and the RSOs should, where practical, open up the various functions of the networks to competitive auctions and, at the local level, invite bids for network enhancements, generation and storage, and demand-side response (DSR) from energy service companies.

·      There should be a default tariff to replace the Standard Variable Tariff (SVT), based on the index of wholesale costs, the fixed cost pass-throughs, levies and taxes, and a published supply margin.

 
Initial reaction to the review was mixed, perhaps because of the wide scope of its contents and the complexity of its recommendations. Michael Grubb, Professor of International Energy and Climate Change Policy at UCL, said: ‘There is a lot to agree with here – and much to chew on. But it would help if Helm acknowledged that the dramatic technology cost reductions he highlights were largely driven by the kind of policies he now suggests should be phased out. Policies need to evolve, but in ways that continue to support new waves of innovation.’

Policy Director of the Green Alliance Dustin Benton, added: ‘Green Alliance welcomes Dieter Helm’s Cost of Energy Review. However with 67 separate recommendations, it is so broad that the worry is that the government will cherry pick the bits it prefers.’