David Merlin-Jones: Chris Huhne's energy policy is unaffordable, and will fail to have much of an environmental impact

David Merlin-Jones is a Research Fellow in economics and energy at Civitas.

Chris Huhne’s ability to stretch the truth has reached new levels after his speech at the Lib Dem party conference. From 2004-9, Britain has experienced the worst energy bill increases throughout Europe: domestic electricity prices rose by 75%, and gas prices by 122%. Now, thanks to Huhne this is continuing, but he wants to pass the buck and hide his complicity in this scandal.

In his speech, the Energy Minister claimed he wants to "get tough with the big six energy companies to ensure that the consumer gets the best possible deal". He goes on to say "it’s simply not fair that big energy companies can push their prices up for the vast majority of consumers." The resulting question the British public should be asking, is why are they raising their bills so much? The answer, and the elephant in the conference hall, is Huhne’s green tax regime.

The Energy Minister’s smorgasbord of energy policies was originally an inheritance from Labour, but has been added to through additional measures such as the carbon price floor. Costs such as the Renewables Obligation (RO) or EU’s Emission Trading Scheme (EU ETS) are imposed on the energy companies themselves, who then pass this cost directly onto the consumer (normally with a bit extra). That way, their profit margins are unaffected. The problem, in theory then, is this pass-through, but really, it does come back to the green policies themselves.

By allowing the costs to be transferred, the policies are rendered pointless. The RO and EU ETS both impose fines on power companies for failing to meet renewable energy generation and CO₂ reduction targets respectively. If the companies can simply divide these fines between their customers, they have no incentive to actually meet the goals. Even if they do invest in high cost low-carbon energy, it is the bill payer who eventually pays for this through increased energy prices, while the companies then benefit from government subsidies which are, unsurprisingly, not redistributed in bill discounts.

If we take DECC calculations at face value (and there is no real reason not to), the cost of all green levies on domestic energy bills has been worked out at £70-90. This is roughly a tenth of total bills, and will be seen as a large cost by many bill payers. However, the real problem is not the cost now, but the rate these will rise to in the future. As many charges bite in to the power companies and are passed down to consumers, bills will rise further. DECC’s own predictions here suggest the price of electricity at 2009 prices will rise from £120/MWh in 2010 to £160/MWh in 2020, mostly through the growing Renewables Obligation. Huhne hopes this will be offset by energy efficiency savings, but even Downing Street doubts this is likely.

It’s not even as though Huhne is trying to have his cake and eat it. It is quite possible to have low-carbon, low-cost power: nuclear energy. The Department of Energy and Climate Change itself has released a report stating as much, estimating nuclear power costs 8p/kWh. So why isn’t Britain investing in a new nuclear fleet to save the planet, and our pockets?

Quite simply, it is Huhne’s own narrow-minded approach to de-carbonising the power supply. He has decided, without real justification, that only renewable energy sources are acceptable, regardless of their inefficiency and huge cost. And then, the chosen energy source is offshore wind power, which the DECC report shows is way and above the most expensive low-carbon fuel source of all at 19p/kWh. The evidence flies in the face of Huhne’s claim to deliver "maximum value for money".

Additionally, Huhne feels there is a lack of transparency when it comes to energy bills. He feels that energy companies should provide consumers with information about how their tariff compares to others. This is a nice thought, but is also a distraction. What should be provided to consumers is the cost of green levies on their bills, so they know how much money they are paying for their energy, and how much for someone else’s good intentions.

This is not available on bills as they stand at present. Nor does Ofgem provide them. Ofgem’s own statistics say green levies constitute 4% of gas and 10% of electricity costs, and then happily remark, "These are not itemised levies on your bill. But they do impact on the price suppliers charge you for your electricity and gas." We are none the wiser as to what costs the most or not. Nor is there any evidence to back up the claim "However, some of these programmes will actually help save you money on your bill". Huhne repeated this at the Lib Dem conference, apparently using statistics unavailable to the public. As far as he is concerned, transparency is a case of "do as I say, not as I do.

It is equally galling to hear Huhne claim that he is tackling fuel poverty. Households are labelled as such when spending over 10% of their income on energy bills and currently, it affects 5.5 million households, a fifth of the total. While current green policies continue, this "tackling" can only take the form of slowing the rising numbers, not actually reducing them, as is really necessary. Indeed, Huhne signed off on the carbon price floor, knowing full well (if he reads his Department’s briefing documents) that by 2020, it could lower 90,000 further households into fuel poverty. These people are wilfully sacrificed for Huhne’s grand dreams. 

Huhne is clearly speeding the UK towards a domestic energy policy that few can afford and that will fail to have much of an environmental impact: it would be hard to think up a worse policy regime. The initial solution perhaps lies simply in educating the public, allowing them fully to examine the green costs and therefore decide rationally if they are willing to pay them and pressure the government accordingly. This is the greater accountability energy bills require, despite the fact it is not the sort of transparency Huhne wants us to have.