To hit net zero, governments must slash energy bills

With renewables reliant on subsidies, rather than cutting power costs they are pushing prices up

From April, households using an average amount of energy will face an annual bill of £1,690 for their combined gas and electricity – down from £1,928 between January and March.

Ofgem’s decision to lower the household energy price cap by 12pc means a saving of £238 a year for the typical household. But given that the price cap is set on a quarterly basis, with this newly announced level in place until the end of June, it makes more sense to think of an average saving of around £20 a month. And while gas and electricity bills will fall for around 29m households from the start of April, the actual amount you pay still depends on how much you use, as the cap is on unit rates, not on your total bill.

For all the positive headlines, though, electricity costs in the UK remain extremely high by international standards – bad news not only for households, but also for British manufacturers. Bills are also way above where they were before Russia invaded Ukraine two years ago, causing turmoil on global energy markets.

During January, domestic end-user electricity prices averaged 29.08 euro cents per kilowatt hour in France and just 22.04 c€/kWh in Spain. In the UK, the average was up at 40.73 c€/kWh – 62pc above the EU average. In the US, while there is variation from state to state, average domestic electricity prices were the equivalent of just 16.27 c€/kWh last month. This at least partly reflects America’s success in transforming itself from a major importer to a major exporter of energy, a change driven by the impact of the fracking revolution on US oil and gas industry output.

Back in 2020, the last full year before signs of escalating tensions between Russia and Ukraine started spooking global energy markets, UK electricity prices averaged around 27.15 c€/kWh – a third lower than now. Lingering high energy costs are a major reason why UK inflation remains at 4pc, double the Bank of England’s target. The comparable figures in the US and eurozone are 3.1pc and 2.8pc respectively, reflecting much lower electricity costs.

One reason UK electricity is so expensive is that wholesale energy costs – which have fallen sharply since the height of the Russia-Ukraine conflict – make up just half of the average household gas and electricity bill. Along with VAT at 5pc, and energy companies’ (relatively modest) profit margins, UK customers also pay hefty “policy costs” and even larger “network costs”.

“Policy costs”, according to Ofgem, are “levies that support low carbon generation, energy efficiency and vulnerable customers”. Meanwhile, “network costs” reflect further subsidies to the renewables industry that , in turn, reflect the UK’s “marginal-cost electricity-pricing model”.

Over recent years, wind, solar and other renewables have generated around two fifths of the UK’s electricity – roughly the same as gas-fired power stations. Coal is now used to generate only around 2pc of our electricity, down from 35pc just 20 years ago.

But “cheap” renewables, far from cutting consumer energy bills, are pushing prices up. That’s because renewables still depend heavily on subsidies. The UK’s now renewableheavy energy mix also needs to have a large fleet of gas-fired power stations on standby – so they are there, ready to be fired up on days when the wind isn’t blowing and the sun doesn’t shine.

Even on days when it is sunny and windy, UK electricity prices are driven by the marginal cost of generation – that is, the spot price of gas. And the shift to renewables is significantly inflating this marginal cost, pushing up household bills too – whatever we’re told about “low cost” renewable energy. For now, renewable companies make serious money from the very intermittency problems they are meant to be solving.

The Government meanwhile takes a big slice – via a low-key but hefty renewable windfall tax. As such, the operation of our renewable-heavy electricity market has seriously aggravated the cost of living crisis. Yet, rather than reforming this pricing system, easing household bills, the Government raids renewable profits – an ever-increasing household energy “stealth tax”.

It is in this context of high energy prices despite years of subsidies to renewable providers that the question of how we get to net zero – and who pays – is becoming increasingly hotly debated. Reaching the 2050 target has enormous cost implications not only for households and firms, but also the Government.

Between now and mid-century, subsidies and other “green investment” will add 21 percentage points to the UK’s national debt-to-GDP ratio, according to a little-noticed Office for Budget Responsibility Report published last year. In today’s money that’s equivalent to £500bn.

Just last week, Olivier Blanchard, former chief economist of the International Monetary Fund, told the House of Lords’ economic affairs committee that transitioning to a low-carbon economy, while “necessary”, will be “much more expensive than people imagine” with a “substantial fiscal cost to achieve anything close to net zero”.

Sir Dieter Helm, Oxford economics professor and another highly respected voice, meanwhile told peers it was “delusory to think” that the net zero transition would pay for itself – as many politicians, from all the main parties, continue to claim.

The process of spreading around the vast costs of net zero 2050 is becoming increasingly politically contentious. Any government wanting support for such targets must find a way to ensure renewables start delivering much cheaper energy bills.

‘Even on days when it is sunny and windy, UK electricity prices are driven by the spot price of gas’