Government Levies on Energy Bills

Bob Stewart Excerpts

Monday 3rd March 2014 Commons Chamber

[Mr Mike Weir (Angus) (SNP)]

We have many debates on the cost of energy to consumers, because the issue is vitally important, especially at this difficult time. The so-called green levies are often identified in the press, and sometimes in the House, as the cause of rising energy bills, but we cannot escape the fact that they are there for a reason. Their purpose is to provide our energy infrastructure for the future, and to ensure that money is invested to promote renewables and take carbon out of the energy system. Only in that way can we reduce energy bills and ensure that they stay low.

Last week the Prime Minister reaffirmed his view that man-made climate change is the most serious problem that affects us all, and it was good to hear that. Let us hope that this time he really means what he says, and will not move on as soon as he has hugged the next husky.

There are still people in the House of Commons, in the other place and outside who deny the reality of climate change in the face of mounting scientific evidence and, indeed, the evidence of our own eyes. The impact of climate change is variable, but it is also undoubtedly dramatic and dangerous. We cannot point to one weather event and say that it is a direct result of climate change, but we can see the pattern that is developing, and acknowledge that our climate is changing. Most of us agree on those points, but if we are to challenge the problem, we must obtain the money and take the measures that are necessary.

We must be brutally honest: if we leave the matter purely to the market, it is highly unlikely that there will be investment in a green economy and carbon-free energy. In the current market conditions, the cheapest form of energy is probably coal. Indeed, more coal is being burned for energy than has been the case for quite some time. However, we also face increasing energy demands, and the combination of the two could spell disaster for our climate. We need only think of the massive smog cloud that engulfed Beijing last week, when even indoors the pollution levels were above World Health Organisation safety levels. To be fair, the Chinese are now coming round to investing in greener energy in order to tackle their problems, but that remains a warning of what we could face if we do not act to tackle our problems. We have done it before: city smogs here became a thing of the past because of regulation, in particular the introduction of the Clean Air Acts.

Totally free markets will not take us where we need to go, so the Government must continue their efforts to ensure that there is real action on tackling climate change and the greening of our energy system. An enormous amount of money is needed for that project, but it should not be seen purely as costs; it should also be seen as investment. As I said earlier to the hon. Member for South Suffolk (Mr Yeo), I was rather concerned about his description of offshore wind farms and the contracts for difference that were needed for them. Having sat through the debates on the Energy Bill and heard what was said about CfDs, I understood that they were variable so that an extra boost could be given to new, untried technologies that needed a lift in order to take off, and so that the subsidy given to established technologies could be reduced. That struck me as perfectly reasonable, because the huge cost of offshore energy will undoubtedly require that extra boost. I would caution against considering alternatives to it just because it is expensive; it has reduced the need for onshore energy.

As we heard from the hon. Member for Truro and Falmouth (Sarah Newton), renewables are making a great difference to local economies throughout the country. They are driving the development of many parts of the new economy. Renewable energy is now a significant part of Scotland’s economy: 11,695 people are in full-time employment in the industry, an increase of 5% over the last year, and the industry is confident that it will continue to expand and employ more people. The latest figures from the Department of Energy and Climate Change show that in 2012 renewables accounted for 40.3% of gross electricity consumption in Scotland—7.5% more than in 2011—and for nearly 30% of Scotland’s total, a record proportion.

In my constituency, there are plans for substantial offshore wind arrays that have the capacity not only to generate huge amounts of renewable energy, but to push investment opportunities and new jobs. However, that will happen only if the CfDs are there to make it happen. My area used to have huge engineering works that went in the dreadful recession of the 1980s, but engineering survived in niche businesses and we are now seeing a real revival in businesses associated with the oil and gas industry—which is vital to the north-east of Scotland and where businesses such as GE Oil and Gas in Montrose are expanding—and many more smaller firms that are part of the oil and gas supply chain and increasingly the renewable supply chain as well. That is where much of the future development will come from.

Apprenticeships are growing, giving real opportunities for youngsters in my area to get a good long-term career, and the skills are transferable into the new renewable industries, giving continuity and a real future in sustainable jobs.

There are problems in the way that electricity market reform has been introduced, however. There have been delays, which have caused concern about investment. Some of the proposed developments have not come to fruition because of the changes to EMR, particularly in respect of onshore wind farms. SSE pulled out of two protected developments.

Much of what has been done has been possible only because of the renewable obligation. I accept that has put some costs on our energy bills, but it has also allowed us to fund programmes that have led to greater efforts to insulate homes, reducing energy use and future bills for consumers.

The hon. Member for South Suffolk mentioned the effect of nuclear—when debating with the hon. Member for Brighton, Pavilion (Caroline Lucas), I think. I was interested in what he said about almost off-the-peg stations coming from China. I have some dubiety about the future of nuclear, it must be said, and my friend the hon. Member for Glasgow North West (John Robertson) and I have debated that on many occasions. The cost of Hinkley Point is of interest to me, and interests in the European Union seem to be looking slightly askance at that. It is worth noting that the cost of the subsidy to Hinkley Point alone is over four times the total cost of the renewables obligation across the whole of the UK during its first 10 years in operation. That puts into perspective the amount of money that is involved. It is also worth noting that I saw a story earlier this week that a plan for a similar design in Finland which is already vastly over-budget and way behind schedule has now been put back for several more years. We really have to wonder just what contribution nuclear will make to energy in the foreseeable future. It seems to me this contract is ruinously expensive and will impact adversely on energy bills throughout the country.

We have to ask whether energy bills are now too high, however. Unfortunately, I think that is true, but it cannot be laid at the door of the so-called green levies. Let us look at the breakdown of costs in our energy bills as set out in the Commons Library note “Components of an energy bill”. It sets out that environmental and social levies amount to between 8% and 10% of the typical domestic dual-fuel energy bill. That is the proportion before the changes announced by the Chancellor in the autumn statement, which, as has been said, removed the funding of the warm home discount from energy bills and should have reduced the proportion further.

Figures produced by the Department of Energy and Climate Change break things down further, and that leads to an estimate that only 2% of the average dual-fuel bill is due to the renewables obligation, which up until now is what has supported large-scale renewable generation, feed-in tariffs and small-scale renewables. That amounts to some £30 a year on the mythical average bill.

I do not deny that for hard-pressed families even such a sum is significant. However, it is not the main driver for increasing energy prices. That is the wholesale energy costs, which according to DECC’s own figures account for between 46% and 48% of the bill. These costs are susceptible to many outside forces, of course. Prices are currently rising quite sharply with the increasing tension in Ukraine as Russia is a major supplier of energy, and in particular of gas to Europe.

I was also interested in the point the hon. Member for Southampton, Test (Dr Whitehead) made about CfDs and gas prices. The idea behind that, as I understand it, was that we would have a definite price for gas. That rising cost is the main driver for energy bills so, in theory at least, if we have a set cost under CfDs for that gas, it should prevent the spikes we have seen in the past and give the consumer, as well as the company, some certainty about what they are going to pay, although nothing in this world is certain.

[Bob Stewart (Beckenham) (Con)]

I am just trying to get this clear. The hon. Gentleman mentions figures of about 8% to 10%, reducing to 2% for renewables, with 46% as the cost of the energy. Is the rest tax? What is the tax percentage in the average energy bill in the hon. Gentleman’s example?

[Mr Weir]

It is not my example; I refer the hon. Gentleman to the House of Commons Library note on this subject, which sets out clearly the various elements, as I do not have it with me today. Obviously, energy companies will make a profit, and part of the taxation on energy bills is 5% VAT. The point about the 8% and the 2% is that only 2% of the bill is directly relatable to the renewables obligation. The differences between the two are the social obligations—the insulation costs and the other costs for creating warmer homes and reducing future energy bills.

It will be interesting to see how these changes feed into energy costs. If, as is claimed, the major companies are operating a hedging strategy for gas that forces them to buy well in advance, there should be little immediate effect—I am referring to the current rise in prices because of what is happening in Crimea. But those who buy the bulk of their supplies on the spot market may well see an immediate impact. It will be interesting to see whether there is a turnaround in who has the higher energy prices as a result of that.

A further major element in bills is the network costs charged to energy suppliers, which, according to the note, make up 20% to 23% of the costs. I have spoken on that issue many times in this House, as well as on the unfairness of the costs, which discriminate against generators, particularly renewable energy generators in the north of Scotland compared with major generators in the south. The regulator, Ofgem, has been looking into this matter, in a seemingly endless investigation, Project TransmiT, which I understand has been put back yet again to a possible introduction in April of next year. There must be more action and a fairer system of transmission reduces the costs faced by renewable energy. That would have a positive impact on bills by reducing the cost to the consumer.

All that having been said, we do need to look at the balance between investment and the price paid by consumers. I support the idea that some of the costs that have been imposed upon consumers are taken off bills and put on general taxation, specifically those relating to providing energy efficiency and insulation measures. It is not often I agree with the Minister, but that was correct.