UK still urgently needs warmer, gas-free, energy-secure homes that green investment brings, even if climate change didn’t exist, argues IPPR’s Josh Emden
As energy bills are set to soar by up to 50 per cent this April, there is a real risk that so-called ‘green levies’ on bills are cut under the misguided impression held by some politicians and commentators that this will help to reduce energy bills. Nothing could be further from the truth. The measures that these levies support – like renewable energy and energy efficiency – are worth pursuing even if climate change didn’t exist.
For starters, it’s gas, not green levies driving this price surge. Levies only represent around 15 per cent of the average energy bill. The wholesale costs – the cost of a supplier buying the gas or electricity generated – are just under 40 per cent and rising. This is the part of the bill that is causing the current crisis, driven by skyrocketing gas prices that rose by 250 per cent between January and September last year.
By contrast, the costs of levies on bills are actually decreasing. This is because a proportion of the levies include subsidies for renewable technologies like offshore wind that were designed so that when the wholesale electricity price increases above an agreed level, developers pay back the difference. In the final quarter of 2021, renewable developers actually paid back £39 million to energy suppliers.
Not only are levies not responsible for the energy bill crisis, they can in fact be the solution. For instance, it is estimated that the government’s flagship energy efficiency policy – the Energy Company Obligation – adds an average of £36 to household bills but delivers average savings of £290 to households that need it most through measures like loft and wall insulation. If the government were to increase funding for energy efficiency and introduce more ambitious efficiency standards for homes, these savings could increase to an average of £511 per household as gas prices continue to rise.
Levies have also supported the development of a genuinely world-leading offshore wind industry that will start generate electricity more cheaply than gas by 2023. And the industry is growing. Only last week, the UK government licensed a massive 25GW of offshore wind in Scotland, more than double the UK’s entire current offshore wind capacity (10GW). These success stories are crucial because they are helping to set up a future of cheap, low-carbon electricity that doesn’t depend on volatile international gas prices.
So why target these levies in particular? For some groups, scrapping levies on bills is just a Trojan horse to disrupt net zero efforts and instead pursue a last gasp dash for gas. Let’s not forget that similar climate-denying or delaying voices were using the same pretext of high energy bills back in 2013 when, once again, the problem was almost entirely caused by wholesale gas price rises. It was these voices that led to David Cameron’s infamous pledge to cut the ‘green crap’.
Far from lowering household energy bills, that act of cutting support and overall energy efficiency standards has made households today more exposed to the current gas price crisis. It has been estimated that energy bills are £2.5 billion higher than they would have been due to lower support for energy efficiency retrofits and poorer house building standards.
This example is a cautionary tale against cutting low-carbon investment – particularly on energy efficiency. But let’s also assess the other part of claims from these groups that we should embrace increased domestic gas production to tackle high energy bills. The argument sounds beguilingly simple: gas prices are high internationally, so let’s produce more domestically to lower prices. In reality, it is far too simple. Not only would an increase in domestic gas production do very little to offset expensive imports since overall production is already declining, it is not a quick fix. Increasing production would require exploring new gas resources that would take years to develop, not to mention derailing the UK’s path to net zero.
Instead of talking about scrapping levies, we should be addressing the legitimate debate about fairer ways to raise money for low-carbon investment. For instance, groups as varied as us at IPPR to the Conservative Environment Network have called for funds to be raised through general taxation rather than energy bills. Previous research by the UK Energy Research Centre suggests that doing so could lower living costs for 70 per cent of households, because the money raised would be more fairly distributed according to income, rather than everyone paying the same through energy bills.
There are also other, far more effective short-term support options for people and businesses struggling with bills that the government should be pursuing, rather than scrapping levy funding. This could include an increase to the Warm Home Discount given to low income households, paid for by a windfall tax on oil and gas producers that are currently making excess profits from high gas prices. The government should also increase the Cold Weather Payments that are made to low income households on particularly cold days and make permanent increases in the generosity of Universal Credit.
The reality is that we still urgently the need warmer, gas-free, energy-secure homes that green investment brings, even if climate change didn’t exist. All of these arguments for preserving green levies and increasing investment in renewables and insulation hold even without acknowledging the escalating climate crisis, but when you add back in the existential threat of global heating, these actions become an imperative. Only by investing in a gas free, energy efficient future can we insulate ourselves from future crises.
Josh Emden is a research fellow at the Institute for Public Policy Research (IPPR).