By John Kemp
LONDON, July 16 In a welcome attempt to help its
British customers understand why power and gas bills are rising
so rapidly and relentlessly, RWE's npower subsidiary has
analysed the make-up of an average bill and found government
policy and transmission upgrades account for almost all cost
increases by 2020.
Policy and regulation will add an extra 144 pounds to the
average combined gas and electricity bill by 2020 while
investment in the transmission network is set to increase bills
by 114 pounds, according to "Energy Explained: The Changing Cost
of UK Energy" published by RWE npower on Tuesday.
Utilities' operating costs are forecast to rise just 33
pounds. Commodity costs, such as fuel and generation, are
projected to fall slightly.
"The cost of funding government policies for renewable
energy, social support and energy efficiency is increasing
faster than any other part an energy bill," npower explains.
The share of each bill attributable to government energy
policies is forecast to rise from 8 percent of the average bill
in 2007 to 22 percent by 2020. By contrast, commodity costs'
contribution will shrink from over half to just one-third.
"Government objectives will mean a significant rise in the
cost of energy," npower warns. "These initiatives are all
important - but consumers need to be aware that delivering them
is causing energy costs to increase, and will continue to do so
for the foreseeable future."
Pinning the responsibility for rising bills on government
policy is likely to infuriate ministers and officials at the
Department for Energy and Climate Change (DECC).
Ministers insist bills will be lower, not higher, in 2020 as
a result of policies designed to encourage more renewable
generation and reduce dependence on fossil fuels like coal and
"Global energy prices are expected to keep rising, putting
upward pressure on our energy bills," DECC wrote in a March
report, "Estimated impacts of energy and climate change policies
on energy prices and bills".
"This is the biggest driver in higher bills," it said. But
"taken together the government's policies mean that household
energy bills will be on average 11 percent, or 166 pounds, lower
in 2020 than if we just sat on our hands and did nothing."
Household bills will still rise in real terms from around
1,255 pounds in 2013 to 1,331 pounds in 2020, but remain lower
than the 1,496 pounds the government says they would have
reached in the absence of policy measures, DECC said.
FUTURE FUEL PRICES
Differences between DECC and npower about what is causing
bills to rise, and the impact of policy measures, stem from
differing assumptions about fossil fuel prices.
DECC reckons future UK wholesale gas prices "are likely to
be influenced by global oil prices which are expected to rise."
"DECC's central gas price scenario assumes a re-linking of
gas to oil-indexed prices in the short-term as the gas glut
erodes," though "from 2017 the linkage begins to weakens
While npower assumes the commodity costs of gas and
electricity will remain roughly flat or even decline slightly by
2020, DECC is forecasting a big rise.
DECC's central scenario assumes real average oil prices
increase from around $111 in 2012 to $123.50 in 2020 and $135 by
2030. It sees gas prices rising from 61 pence per therm in 2012
to almost 72 pence per therm by 2020 and levelling out
thereafter ("DECC Fossil Fuel Price Projections" Oct 2012).
By assuming real fuel prices will continue to rise strongly,
DECC's scenarios show major financial benefits from switching to
alternatives like wind and solar as well as investing in energy
conservation measures such as better home insulation.
The problem is that DECC's assumptions seem to be stuck in a
time-warp. They are based on peaking oil and gas supplies and
rising costs. DECC's central scenarios make no allowance for the
shale boom or a structural break in oil and gas prices in the
DECC's price scenarios appear outdated and flawed. So far in
2012 and 2013, futures markets have put the cash price of a
barrel of oil delivered in December 2019 at just $89-90, far
below DECC's inflation-adjusted central scenario of $123.50 let
alone it's high scenario of $150.60.
Futures prices have even been slightly below DECC's low
scenario, based on assumptions about production costs.
DECC is also assuming a big reduction in the amount of gas
and electricity that UK households use as a result of efficiency
By 2022, the department expects around half of households to
have at least one major insulation upgrade, such as loft or
cavity wall insulation, which could cut annual heating bills by
25-270 pounds for each household.
Spurred by building regulations, 12 million gas-condensing
boilers will be replaced by newer and more efficient ones by
2020, saving households 25-120 pounds per year.
Smart meters are supposed to be rolled out to all households
by the end of 2019, which will help households make "more
informed" energy decisions, though the department is silent
about whether smart meters will be coupled with smart tariffs
and time of use, critical peak pricing or rebates.
"Successful implementation of energy efficiency measures can
more than offset the cost of policies on household energy bills
on average by 2020," DECC claims, citing analysis by the
government's own statutory Committee on Climate Change.
Most of the costs of greening Britain's gas and electricity
system are being passed on to households as customers through
their utility bills, rather than as taxpayers through explicit
taxes and subsidies.
The result is that discussions about the cost of supporting
renewables and energy efficiency get caught up in broader
discussions about "profiteering" by the utility companies and
the future cost of fossil fuels.
RWE npower claims just 16 percent of a typical consumer's
combined gas and power bill is under the direct control of
utility suppliers, and that average profit margins are just 5
In trying to bring greater transparency to bills, RWE's
message to customers is: don't blame us for price rises which
are driven by government policies.
Charging gas and electricity users for the transition to
renewables and energy efficiency measures through their power
bills makes sense. But there is a risk that the true costs of
these policies becomes hidden and is not properly understood or
If RWE npower's report shines some welcome transparency on
the make-up of utility bills, and prompts a discussion about the
costs and benefits of various interventions in the energy
market, as well as assumptions about future fuel prices, it will
have made a major contribution to Britain's energy debate.