Oliver Wright, Whitehall Editor
The Government is facing a multi-billion pound black hole in its budget to
pay for new clean energy supplies, which could result in rising household
electricity bills unless there is a dramatic decline in investment in
renewable technologies.
Senior Whitehall sources have told The Independent that the Department of
Energy and Climate Change has already overspent its budget by £1.5bn to
support renewable energy projects over the next five years.
But ministers are being warned that unless they increase the budget still
further and bring more renewable energy projects online, the UK will have
no hope of hitting its legally binding commitments to reduce greenhouse gas
emissions in the mid-2020s.
Under the Government’s current projections, the total additional costs
added to an average household’s electricity bill to pay for the green
schemes are already due to rise from £89-a-year to £188 by 2020. But if
ministers continue to pursue official targets with the necessary future
investment, this figure will rise significantly.
A new analysis by the think-tank Policy Exchange suggests that the current
overspend on renewables subsidies alone could add an additional £20,
pushing energy policy costs for the average household to nearly £210 per year.
“Sorting this out is the number one priority for the department,” said one
Government source.
“But the truth is there is no easy solution to any of this. It is ‘answers
on a postcard’ time.” The problem has arisen because of failings in the
framework which the Coalition Government set up to encourage small and
large-scale providers to generate renewable energy.
Under the scheme, everyone – from a household who decided to put a solar
panel on the roof to the developer of an offshore wind farm – was
guaranteed a premium on top of the market price for electricity, to help
encourage the development of renewables.
The subsidies are paid for by a “levy” on household energy bills, which was
meant to be capped to ensure that bills did not rise too fast.
But due to a decline in the wholesale price of oil and gas, as well as
higher than expected installation of home solar panels, this budget of
£7.6bn per year has already been busted by more than 20 per cent.
Figures slipped out by the Office of Budget Responsibility at the time of
the Budget showed total spending on renewables subsidies such as the Feed
in Tariff, Renewables Obligation and Contract for Difference, could
increase to £11.5bn in nominal terms by 2020/21. This not only means that
the budget is fully allocated, but that the “headroom” which the Treasury
created to allow for any overspend has already been spent as well.
Unless more money can be found, key projects such as carbon capture and
storage, as well as the future of new offshore wind farms, could be placed
in jeopardy.
Ministers are understood to be concerned that, as well as failing to hit
the UK’s carbon reduction target if such projects are scrapped, the UK’s
nascent renewables industry will be put into deep freeze with a knock-on
effect on jobs and investment.
However, they are also aware that any attempt to pay for the addition
investment by increasing gas and electricity bills is politically toxic.
“Increasing bills beyond what they are due to rise by anyway is a red line
for us,” said a senior Conservative source. We have to find another way
around this because we can’t keep on spending money that isn’t there.”
The report by Policy Exchange, published on 16 July, says that the average
household energy bill has risen by £240 over the past five years, with £120
of this due to increases in policy and network costs.
It estimates that, as a result of the current overspend that policy, costs
alone could increase from £89 per household now to over £200 per year by
2020. The DECC claims that this rise will be offset by improvements in
energy efficiency, but this has been challenged by other Government experts
and consumer groups.
“Household energy bills have soared in recent years,” said Richard Howard,
the author of the report. “Government should take its decarbonisation
commitments extremely seriously but must also recognise that what consumers
really want is affordable energy.
“That is why we are proposing that there should be stronger consumer
oversight over policy decisions, and that government should look at ways to
meet energy and climate objectives at lower cost to consumers.”
He added: “Our analysis shows that DECC is likely to break through the
agreed spending cap on renewables subsidies. This will add additional costs
on to consumer bills, squeezing household budgets even further.
“Government urgently needs to take action to stem the rise in policy costs.
Little can be done to change the existing commitment made, but Government
must think more seriously about the affordability of energy policies going
forward.”
Joss Garman, Associate director for energy at the IPPR think-tank, added:
“Ministers need to rethink the funding model for clean energy and focus on
the cheapest green technologies like solar power. Just hiking up green
taxes on bills is not fair or sustainable ways to pay for low carbon
transition.”
A DECC source said that the OBR figures were merely “projections” that were
kept under constant review.
“This allows us to put in measures to protect bill payers,” they said.
A spokesman added: “Reducing energy bills for hard-working British families
and businesses is this government’s priority.
“We’ve already announced reforms to remove subsidies for onshore wind and
that work to make sure bill payers are getting the best possible deal is
going to continue.”
When the levy breaks: renewables subsidies
In the last parliament the Government introduced a “levy control framework”
that was supposed to cap the amount of money that could be spent on
energy-efficiency measures and new renewable projects – paid for out of
consumer bills.
But over the last few years the Government has had limited control of this
spending as a result of its own policies to promote green energy.
For example, many more people than expected have benefited from subsidies
for home solar power, while onshore wind farm development has also come on
apace.
This has led to the slightly farcical situation where on occasions too much
electricity has been generated and suppliers have been paid to produce
energy for the grid.
A decline in the wholesale price of oil and gas – on which some subsidies
are based – has exacerbated the problem, meaning the £7.6bn annual budget
has already been allocated up until 2020.
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