Alan Whitehead
Main Page: Alan Whitehead (Labour - Southampton, Test)Government Levies on Energy Bills
Alan Whitehead Excerpts
Mr Yeo
I am not sure whether the total comes under public expenditure. The money is not coming from taxpayers; it might merely affect electricity prices. In the context of the fact that the Committee on Climate Change now sets carbon budgets a minimum of a decade in advance and that we now have a fourth carbon budget that covers the period up to 2028—even the third carbon budget goes beyond the period for which we know the levy control framework total—I am simply asking for some indication of the Government’s thinking. Will the total be maintained in real terms at £7.6 billion index-linked, given that a very big demand on levy control framework money will be made in the early to mid-2020s if the nuclear power station goes ahead?
Dr Alan Whitehead (Southampton, Test) (Lab)
To underline the hon. Gentleman’s point, does he agree that the likely take on CfDs in one year when Hinkley C comes on stream in 2023 will probably be more than the total money currently available for new entrants under the levy control framework? Does he therefore wish to emphasise that it would have a seismic effect on CfDs over the period 2020 to 2025, and the Minister might also want to consider that point?
Dr Alan Whitehead (Southampton, Test) (Lab)
I want to draw attention to a number of curiosities in relation to the levy control framework and Government levies for underwriting various new, and sometimes not so new, forms of power for the future.
The first curiosity is that the levies are not in the estimates: according to accounting conventions, they cannot be. One of the central things to which the Energy and Climate Change Committee drew attention was the fact that because the current accounting regulations mean that levies cannot be placed within end-of-year accounts or estimates for the Department, some fairly urgent action is needed to bring those issues back under the parliamentary gaze and make them accountable to and discussable by this House.
As we heard from the hon. Member for South Suffolk (Mr Yeo), the Chair of the Committee of which I am proud to be a member, much work to decarbonise the UK’s energy economy is underpinned by levies on energy bills. The chosen instrument that the Government have introduced to control those levies is the levy control framework, which is itself a very curious beast that was introduced by sudden fiat in the Budget of 2011. It was announced in the additional document to that Budget called “The Plan for Growth” but without, as far as I know, any debate, pre-scrutiny or other examination of its effect as regards the inclusion or exclusion of various levies. Subsequently, without that examination, it has controlled, pretty selectively, DECC’s spending on support for renewable and low-carbon energy.
I say “selectively” because although it was claimed, as the original Treasury paper stated in introducing it, that that the levy control framework
“will include all DECC’s existing or new policies which entail levy-funded spending”,
it does not do anything like that. In effect, it controls selected and nominated levy-funded underwriting for certain activities. It initially controlled the renewables obligation and the feed-in tariff for smaller renewables, and it has controlled the warm home discount, although that has recently disappeared into general taxation. In future, it will control the renewables obligation’s successor, contracts for difference, with continued payments from the renewables obligation after the system switches in March 2017. The RO will not go away; it will continue for a long time after the change has taken place and will continue to control feed-in tariffs for solar and small-scale renewables.
The total controlled expenditure will be some £7.6 billion, in 2011-12 prices, in 2020-21, rising from just over £3 billion in 2013-14. That sounds not just like a lot of money but like a huge increase in money, but we must remember that it is the total that has to underwrite the target of 30% of renewable electricity generation by 2020. In some scenarios published by DECC, it may just about achieve that, but in other unpublished scenarios it may not. The reason it may not is that the expenditure total has to include not only the cost of new entrants each year, as those new entrants come to produce renewable and low-carbon power that contribute towards the target, but the cumulative overhangs of what has already been agreed previously under the renewables obligation or, after 2017, contracts for difference payments, which will run on for 15 years after they have been agreed. In most instances, RO payments will continue for 10 years after they have ceased being issued in 2017. Over the whole period up to 2020, certainly, and even after that, all the payments that have been agreed for any new projects will continue throughout the whole period and will accumulate within the levy-controlled total expenditure.
We do not know how the figure of £7.6 billion for 2020 was arrived at—it was simply announced. Only more recently have estimated figures on the annual margin that will be available for new entrants every year been published. It turns out that those figures will be slightly less per year than is currently available for new entrants each year in terms of new renewables obligations and, subsequently, contracts for difference. I personally feel that given DECC’s figures on how it will achieve a doubling of the deployment of mainly offshore wind by 2020, the aspiration is probably a little heroic.
Another curious aspect of the levy control framework is that it controls the sums involved but not what is actually deployed. In the case of the renewables obligation, it is reasonably possible to forecast what expenditure might be against deployment. Indeed, according to the National Audit Office, DECC has produced pretty accurate figures for this over the several years of the levy control framework so far. However, when contracts for difference are introduced in March 2017, it will be much less easy to do that. That is because the amount of underwriting, and hence levy, that arises from a contract for difference is inherently variable and only predictable in ballpark terms. What a generator gets as a payment is the difference between the agreed amount for the strike price and the reference price, which is the prevailing price of wholesale electricity in any one month. If the price dips, the amount paid increases; if the price rises, the amount paid decreases.
It is certainly conceivable, as the Chairman of the Committee suggested, that in circumstances of a high wholesale electricity price, generators could start paying back money that they have obtained because the reference price is higher than the strike price. It would be interesting to see whether any consideration has been given to how that money coming back might be deployed and whether it would be put towards more renewables investment or disappear into the Treasury; I suspect I know the answer. It is at least a possibility that that could happen over the next period. The point is that the generator gets a known return but the levy payments themselves could vary enormously. If, for example, the Chancellor caps the carbon floor price in 2016, that would probably reduce the price of electricity, albeit by encouraging high-carbon generation. It would, however, increase the payment that generators get from the CfD, possibly quite substantially. Owing to the fact that the amount is capped each year against a small amount of additional headroom for the Department, which then needs to be adjusted over the next year in the Department’s subsequent estimates, room for new entrants could be dramatically squeezed through the payments of larger sums each year. Therefore, as a tool to cap expenditure on levies, the LCF may function, but it cannot underpin a clear level of deployment over time. It deals with one side of the equation but not the other.
The next curiosity of the levy control framework is that it does not really control levies overall. As we saw recently, the only levies that were removed or altered in the so-called green levy review were ones that did not have a control over them at all, or that will be out of the LCF by 2020. As we have heard, the energy companies’ levy-based obligation is exactly in line with the levy control framework. What was not within it was eviscerated, with calamitous consequences for local authority and housing association solid wall and hard-to-treat home schemes. The warm home discount has gone into being funded by general taxation.
The levy control framework is supposed to control levies that are defined by the Office for National Statistics as tax and spend—that was in the original Treasury document that set out the LCF. In fact, it is defined by the ONS as putative tax and spend. Although no money goes into the Exchequer, the effect on the consumer is as if a tax had been levied, but with no control over it. As I have underlined, that was the stated intention of the LCF in the document that introduced it.
The original levies preceding the levy control framework were introduced precisely because they were off the books and would not count against spending totals. However, the LCF effectively makes them count again, dependent on the ONS definition. One might say that a policy that levies charges on consumers because it does not count, but is then controlled through a mechanism that makes it count, is rather a circular policy. In the long run, it might better be replaced by a policy that levies a tax on companies and people’s wealth, and then allocates that to underwrite the desired deployment to plant—perhaps that points out something that must not be said.
The levies counted in the levy control framework will be, as the original document states, based on ONS independent definitions. However, the ONS barely got round to classifying previous levies—the community energy savings programme and the carbon emissions reduction target—before the LCF came in. Indeed, it classified those as putative tax and spend, but only after they had come to an end. The Treasury then had to predict what the ONS might do if it classified some newer levies to set up the LCF.
One could say that the choice of what was in or out when the levy control framework came about has essentially been a political and not a statistical decision, underlined perhaps by the curious fact of two enormous levies. One of those is the energy company obligation, which could perhaps now come to £2.6 billion over four years. Most significantly, coming down the road, we ought to know the capacity market payment system, which is potentially £1 billion a year on average until 2020. Those are levies on customers’ bills to persuade energy companies to build gas-fired power stations and make them available for the provision of power, not to pay them for providing power. If they then provide power, having made themselves available and got a levy as a subsidy, they will be paid again. That is definitely coming down the road—a huge levy increase outside the LCF. Those are clearly levies and will turn up on customers’ bills. Probably, if included, they could double the control total.
The ONS has not yet got round to considering whether ECO should be counted in, and as far as I am aware—probably for quite prudent reasons—it has not gone anywhere near capacity payments. In any event, DECC is still figuring out how to manage and control such matters, as well as how to manage and control the energy demand reduction side of capacity market payments should they be included in the energy auctions that, as I have mentioned, will be coming down the road.
Some levies have, of course, already gone down the taxation route. The renewable heat initiative was to have been a levy but it is now funded from general taxation. The warm home discount has recently gone from being a levy to being funded by general taxation, and—still to come—the money to support carbon capture and storage has shrunk to £1 billion and is also funded from general taxation, with no clarification as to whether subsequent CCS gets a CfD, and will eventually be in the LCF. Perhaps it will get capacity payments that are levied but not in the LCF, or perhaps it will just get support from tax. There is, therefore, no consistency about what is controlled and what is not, and apparently no clarity on the horizon.
We then come to the next curiosity of the system. Apparently, including estimates and outcomes of levy controlled expenditure—it never really arises as solid tax in and solid expenditure out—cannot, as I have emphasised, safely be put in departmental estimates or end-of-year accounts. Since 2012, no levy expenditure in accounts or estimates has been put forward by the Department. That brings us back to where we started. The LCF was sprung into being without debate or scrutiny from this House. We do not know what goes into the figures in the framework or whether the expenditure undertaken is value for money, because none of the workings is in the accounts and estimates. We do not even know what relationship there is between the policy objectives of each levy and their likely realisation. It seems that the agreed policy outcome of the deployment of renewables has possibly been seriously compromised by the introduction of the LCF, but we do not know because nothing is there to assist with finding out.
We know that ECO will now not even remotely reach its suggested policy target of 180,000 hard-to-treat home treatments by 2015, but we have not had a chance to discuss or debate either the initial policy or its revisions. The whole question of levies lies, it seems, outside the policy and scrutiny process. Both the NAO and the Energy and Climate Change Committee found that to be highly unsatisfactory, and suggested imperative remedies. In a letter to DECC, and in its most recent report on the LCF, the Committee suggested:
“There should be a single annual report covering all the DECC levy-funded schemes along with other Government initiatives which affect energy bills but fall outside of the Levy Control Framework,”
in the way I have illustrated. It said that that report should contain:
“Future plans, and comparisons of agreed budgets and final spend (outturn) for each funding stream.”
It should have:
“Easily identifiable “costs per customer” for each scheme on a consistent basis…including the impact that government decisions have upon requirements over time.”
and should contain:
“Measurable outcomes achieved through spending, including as a minimum the progress made against carbon targets and…other specified objectives of the schemes, and the impacts on consumers.”
That should certainly include
“an appraisal of the relationship of the LCF to its overall policy targets.”
I heartily endorse those recommendations, because at the very least they will bring the rationale and its relationship to policy objectives set elsewhere in Government under the purview of this House, so that that can be properly appraised. That, and the value for money or otherwise achieved by the process, can be properly appraised and assessed by this House, both at estimate time and at outturn time.
I would go further and reflect on the last line of the Select Committee recommendation. It is clearly deeply unsatisfactory that some levies are in a control framework, some are outside and some have, for purposes of expediency, been placed into general taxation. There should be consistent treatment for all. If we are not to go to a system that, ultimately, is better all round, but which I know causes problems with our odd British method of accounting for public expenditure that is at odds with how most other European countries do it—namely, by raising taxes openly and allocating support openly on the basis of what has been raised—then at least levies across the board should be treated in the same way. After all, they all end up in the same place—on the customer’s bill—and the overall positive effect of the levies, which in the longer term are certainly likely to be beneficial to those bills, can be properly appraised and prioritised.
As matters stand, we are essentially presenting a series of obscurely worked out and obscurely justified schemes as, somehow, a major and coherent policy driver. They most certainly are not. Fundamentally, the levy mechanisms should relate to the policy goals they are supposed to underwrite. What are the best value and most efficient mechanisms that will take us where we want to go on policies, once they have been decided? As it stands, the levy control framework is a very long way from doing that.
Sarah Newton (Truro and Falmouth) (Con)
I am sure we can all agree that delivering an energy policy that guarantees security of supply at prices businesses and people can afford is an essential and challenging task, especially after years of procrastination under the previous Government. This Government’s energy policy, based on a mixture of generating capabilities, is vital to our national security. The more energy we can produce on our own shores the better. The current situation unfolding in Ukraine is very worrying in many ways, but it is a timely reminder of the risks of relying on imported gas.
The Government are right to back renewable energy. It is particularly important to look at marine renewable and geothermal. As a Member of Parliament representing the south-west of England, hon. Members would expect me to say that. I was absolutely delighted when the Government set up the South West Marine Energy Park. I can perhaps give the hon. Member for Southampton, Test (Dr Whitehead) some of the evidence he was asking for, on the positive impact of the Government’s policies on renewable energy, from my experience in my constituency.
As a result of the announcement before Christmas of the strike prices for renewable energy, we have seen a huge increase in interest from overseas investors into marine renewable energy in my constituency. We are the home of the Falmouth bay test site, the FaBTest site, which is a very innovative partnership between the university of Exeter, the Falmouth Harbour commissioners and local businesses. It is an excellent site to pilot and test marine renewables which enables developers to understand how much energy can be created and the economics of it, which can then be scaled up to fully deployed devices on the wave hub. We have seen investment already, from Scandinavian countries, to build new devices that are currently being deployed, with a great pipeline to come. It is attracting not only investment but a great deal of new, high-quality engineering jobs to my constituency, all of which is to be welcomed.
Dr Whitehead
I underline the hon. Lady’s point that wave, tidal and other new forms of energy are beginning to secure a lot of investment, and invite her to attend the all-party group on renewable and sustainable energy meeting tomorrow on precisely that topic. We would be delighted to see her there.
Sarah Newton
I welcome any opportunity to draw attention to the fantastic and innovative work of companies in my constituency to create wealth, prosperity and new jobs, so if I can find time in my diary I will certainly come along.
I have seen evidence of the substantial impact of the new strike prices for renewable energy in the short period since they have been announced. Among all this good news, however, there are a few issues I would like to draw to the attention of the Minister.
My hon. Friend the Member for Southport (John Pugh), who is no longer in his place, made some very good points on the impact of the changes to ECO announced in the autumn statement. The reduction of people’s energy bills by about £30 to £35, as a result of those changes, has been welcomed by households across my constituency and, I am sure, across all hon. Members’ constituencies. However, some of the measures—particularly the reduction in the carbon emissions target for hard-to-treat homes by a third and the extension of measures to include cheaper options such as loft and cavity wall insulation—have had an impact on off-grid customers living in fuel poverty in my constituency, and have made the introduction of soluble insulation to low-income households virtually impossible.
Why is that important? The changes are having a disproportionate effect on constituencies in rural areas such as mine, where 35% of homes have solid walls compared with 22% nationally, and 48% of households are living off the gas grid compared with just under 15% across the country. As we all know—we have debated it many times in this House—people living off the gas grid pay much higher energy bills than those who are on the grid. Under the Hills definition of fuel poverty, that affects about 10% of households in my constituency, and that figure will be replicated across other rural areas. The Minister has taken great care to listen to MPs representing areas such as mine, and has taken real steps to try to tackle fuel poverty in off-grid households. Will he consider taking two further steps that could have an important impact?
The Minister created the off-grid ministerial round table, which is already proving to be a very valuable body that has made improvements for the group of people concerned. At the next meeting in May, I would very much like him to consider evidence from members of that round table, such as Community Energy Plus in my constituency, on the impact of the ECO changes on its ability to tackle fuel poverty in off-grid households. There might be some very simple tweaks, without extra cost, that could be made to the programme to enable us to help people who are particularly hard hit by the changes.
Secondly, will the Minister consider inviting the head of Public Health England to join the round table? Public Health England has rightly identified the reduction of fuel poverty as an essential health outcome. As we all know, living in cold homes exacerbates existing health conditions. It can often lead to unplanned emergency admissions to hospital and lead to a delay in people going back to their homes, because of the detrimental impact of allowing them to move back home. We live with the blight of excess winter deaths. The national health service has ring-fenced budgets, as do public health bodies and local authorities, and I think that they have an important role to play in driving down fuel poverty. Community Energy Plus in my constituency has been working with health officials and with me to develop an evidence base and a toolkit that will enable public health commissioners to fund insulation and other measures that would allow people to live in warmer homes. It would be excellent if work of that kind could be shared at the round table, and if Public Health England took up the challenge to provide an evidence base that would enable people working on the energy company obligation and on improving the energy efficiency of homes to work alongside health officials around the country in driving down fuel poverty.
I welcome the Government’s approach to energy policy and to tackling fuel poverty. I hope that the Minister will consider the simple steps that I have described, because I think that they could make a positive difference to the health and well-being of my constituents and others throughout the country.