How costs to the consumer are affected by changes in energy and climate change policy.
Energy and climate change policies impact households and businesses through changes in prices for goods and services and changing patterns of consumption, in particular for energy.
The Department of Energy & Climate Change (DECC) is committed to being open and transparent about the impacts of these policies. The policies impacts document reflects our commitment to publish the estimated cumulative impact of energy and climate change policies on energy prices and bills for households and businesses.
It updates the analysis published in November 2011, incorporating the impact of policy announcements made since then, and also extends the analysis to include more detail on the distributional impacts across the household sector. Only those policies already in place or that have been planned to a sufficient degree of detail (i.e. with quantified estimates of costs and benefits), have been included in the modelling.
Factors that increase our energy bills
Recent increases in energy bills have mainly been driven by rising international prices for fossil fuels, particularly gas, not energy and climate change policies. Energy bills are likely to continue on an upward trend over time, with or without policies, as a result of rising fossil fuel prices and network costs.
DECC policies – designed to deliver low-carbon, secure and affordable energy supplies, help households and businesses save energy and to support low income and vulnerable consumers – will have an impact on energy consumers across the UK. This will be felt through changes in prices for goods and services and changing patterns of consumption, in particular for energy.
Were the UK to do nothing, our energy supplies would become much more dependent on imports, more vulnerable to volatility in global fossil fuel prices, and there would be a far higher chance of costly and disruptive blackouts.
Policies which help decarbonise the UK’s energy supplies (such as the Renewables Obligation (RO)) will reduce the vulnerability of UK energy prices to movements in fossil fuel prices but will add costs to retail prices in the short- to medium-term.
If fossil fuel prices rise more than DECC’s central projection, the impact of policies on businesses will be reduced and the savings for households increased, because government policies help to shield energy consumers from rising fossil fuel prices. However, if fossil fuel prices fall, then the benefits of policies would be less and the costs more.
Changes in this year’s report
The analysis in the report has been updated since November 2011 to reflect the latest assessment of policies. In particular the analysis reflects:
The November 2012 announcement of the HMT Levy Control Framework, aimed at delivering policies within cost limits, to make sure DECC achieves its fuel poverty, energy and climate change goals in a way that is consistent with economic recovery and minimising the impact on consumer bills.
This year’s analysis includes the estimated impacts of Building Regulations which have set minimum standards of efficiency for gas condensing boilers since 2002. This was not captured in previous analysis due to the absence of robust savings estimates. Results are shown both including and excluding Building Regulations.
The impact of DECC policies on household energy bills
The costs of policies currently represent 9% (£112) of the household dual fuel (electricity and gas) bill – with around half of this cost funding policies that help deliver savings for those that need it most (through the Energy Company Obligation and the Warm Home Discount). This compares to wholesale energy costs which account for nearly half of the bill.
Moreover, these policy costs do not take account of the energy savings that evidence shows policies are delivering. For example, a total of 2.4 million wall cavities, 4.9 million lofts and 88,000 solid walls have been insulated through Government schemes since April 2008. Evidence on actual energy consumption shows that these measures can deliver significant savings – from £25 to £270 or more per installation per year.
Accounting for energy efficiency savings delivered through government policies, the average impact of policies is estimated to be a net saving for households of around 5% in 2013, compared to what bills would have been if these policies had never been introduced
Reductions to consumer bills
The Government has taken a number of steps to reduce the impacts of energy and climate change policies on consumers’ energy bills, including:
funding the Renewable Heat Incentive through general taxation rather than a levy on the supply of fossil fuels,
reforming the electricity market to bring on low carbon for less in the long term,
setting up the Green Deal to upgrade the nation’s homes with no upfront cost,
deciding to make £40 million saving in 2014 to 2015 on spending for the small-scale Feed-in Tariff (FIT) scheme.
Projections for 2020
Going forward, energy bills are likely to continue on an upward trend, with or without policies, as a result of rising wholesale energy and network costs. Although the cost of policies will also increase going forward in order to support increasing low carbon investment, policies will deliver increasing energy efficiency savings:
by 2022, around half the UK household population is expected to have at least one major insulation measure (loft, cavity wall or solid wall insulation) delivered through supplier obligations since 2002, which could save households from £25 to £270 or more off their annual heating bill;
further households could also benefit from efficiency improvements if they choose to take up a Green Deal;
tighter efficiency standards for household energy appliances as a result of Products Policy are expected to deliver an average annual saving of around £158 per household in 2020 (including around £25 per household through more efficient TVs and set-top boxes, £25 through more efficient consumer electronics and around £20 through more efficient lighting);
around 12 million gas condensing boilers will be replaced between now and 2020, with the large majority of these being newer, more efficient versions (as a result of Building Regulations), saving each household from around £20 to £120 or more per year;
Smart Meters will be rolled out to all households by the end of 2019, helping households make more informed energy decisions.
As a result, household dual fuel bills are estimated to rise by less than in the absence of policies – in 2020 households are estimated on average to save around 11% (or £166) on their energy bills compared to what they would have paid in that year in the absence of policies. This is because the impact of policies in helping people to save energy, or use it more efficiently, is expected to more than offset the impact that policies delivering low carbon investment will have on energy prices. Excluding Building Regulations, the average saving is around 6%, comparable to the 7% saving estimated in November 2011.
The large majority of households are expected to achieve savings through Products Policy, Building Regulations and Smart Meters, meaning even those households that do not benefit from any insulation measures or rebates could still save around £15 or 1%, on average, on their energy bills in 2020.
Poorer households are typically hit hardest by rises in energy prices. However, a number of government policies take special account of the needs of low income and vulnerable households, including the Warm Home Discount (WHD) and part of the Energy Company Obligation (ECO) which are targeted at low income and vulnerable households – helping them to heat their homes more affordably and to a more adequate level.
As a result, average energy bills for the poorest 30% of households are expected to be 14% lower as a result of policies in 2020, compared to in the absence of policies.
Current action to help vulnerable households warm at an affordable cost
Helping low income and vulnerable households keep warm and tackling fuel poverty is a priority for the government. Action taken by government to help some of the poorest and most vulnerable keep warm at an affordable cost includes:
requiring energy suppliers to provide up to £1.1 billion worth of direct support on energy bills through the Warm Home Discount (WHD) scheme, which supports around 2 million households per year.
the Green Deal and Energy Company Obligation (ECO) which will improve the thermal performance of homes, including those of low-income and vulnerable households.
The impact of DECC policies on business energy bills
Business energy costs depend on a wide range of factors, including size, fuel mix, whether electricity is sourced from the grid or generated on-site and whether they are covered by the CRC energy efficiency scheme or Climate Change Agreements.
UK businesses (of all sizes) currently pay the lowest gas prices in the EU 15. Small and medium-sized industrial users currently pay electricity prices around the median for the region and larger energy users currently pay electricity prices above the median.
For most businesses energy costs are a small proportion of total business costs – less than 3% on average for the UK manufacturing sector. By contrast, employment costs represent around 18% of the total. This implies that energy and climate change policies are currently adding less than 1% to total business costs in this sector.
Businesses that are medium-sized consumers of energy
A medium-sized business user is defined by an annual consumption of between 2,778 and 27,777 megawatt-hours (MWh) of gas and between 2,000 and 19,999 MWh of electricity.
Businesses that are medium-sized consumers of energy and are participants in the CRC Energy Efficiency Scheme, currently face energy bills that are on average 21% higher as a result of policies. By 2020 the impact of policies is estimated to be 22%.
Medium-sized businesses that are not CRC participants are currently facing energy bills that are on average 15% higher as a result of policies. By 2020 the impact of policies is estimated at 26%.
Measures that will reduce the impact of policies on energy bills
The most effective way to reduce energy bills for business is to improve energy efficiency. The Green Deal enables businesses as well as households to reduce their energy bills through improving the heating efficiency of their buildings. The Government has consulted on ways in which businesses can be incentivised to reduce their demand for electricity, including the possibility of measures to be included in the Energy Bill currently going through Parliament. The Government will shortly be publishing its proposals on how it intends to promote electricity demand reduction amongst businesses.
The impact of DECC policies on energy-intensive users’ energy bills
Costs to energy-intensive users
Businesses that are large energy-intensive users – where energy costs represent a significant proportion of their total operating costs – face varying impacts depending on, among other things:
- their mixture of gas and electricity use
- their ability to use their buying power to negotiate lower prices
- the extent to which they consume on-site generated electricity exempt from a number of policy costs, such as the RO
As a result, policies are estimated to be adding between 1 and 14% to energy bills for these users in 2013 and between 6 and 36% in 2020 (excluding the impact of measures Government is considering to reduce impact of EU ETS, CPF and CfDs).
Measures that will reduce the impact of policies on energy bills for energy-intensive users
The impacts above and set out in the report do not include measures the Government is currently considering to reduce the transitional impact of the EU ETS, Carbon Price Floor and Contracts for Difference on the costs of electricity for the most electro-intensive industries where these could have a significant impact on their competitiveness.
Together these policies make up the majority of future policy costs for energy intensive users, adding up to 23% to their total energy costs by 2020. Any potential reduction in the costs due to these measures is not reflected in the analysis because the exact details of any support have still to be decided. However, as an illustration, on the basis of a firm receiving compensation for 75% of these costs it is estimated that this would lower the impact of policies on their total energy costs in 2020 by over half.
This is in addition to the help that energy intensive industries already receive through Climate Change Agreements covering 51 sectors enabling firms to receive up to 90% discount on the Climate Change Levy. Further, the Government has announced it will introduce exemptions from the Climate Change Levy for energy used in metallurgical and mineralogical processes from 1 April 2014.