It is one of the ironies of the energy transition that soaring natural gas prices are prompting calls in some countries for the reduction of environmental and social levies that are specifically aimed at protecting consumers from high oil prices. energy. In the UK, politicians and energy bosses – from conventional and green energy companies – are calling for changes to a range of green and social charges in a bid to alleviate a looming cost of living crisis.
Some right-wing politicians see an opportunity to cut spending on a climate crisis they deem overblown. Other commentators are more concerned with funding renewable energy, energy efficiency programs and helping the fuel poor in the fairest way possible. Questions about financing the transition to a net zero economy will only become more pressing.
Concerns over green and social levies, reignited by the squeeze on natural gas supplies since September 2021, have been made urgent by the upcoming review of the UK’s energy price cap. This limits the amount that retailers can charge domestic consumers per unit of gas and electricity. Set by energy regulator Ofgem every six months, the cap is currently set at £1,277 for the average household on a standard gas and electricity tariff. Analysts expect Ofgem to raise it by around 50% at the next review in April 2022.
The government is considering a range of relief measures, including scrapping the 5% value added tax on energy, providing discounts on bills and offering energy retailers financing in the short term to help them weather the current high wholesale prices. The opposition Labor Party is calling for an exceptional tax on oil and gas companies. However, a growing number of voices are rising against green and social levies.
Some, like the right-wing Conservative MPs in Net Zero Review Group, wish to see these levies suspended to relieve consumers. MP Robert Halfon claimed the costs represent 25% of consumer bills (the actual figure is about half).
The CEO of Centrica, one of the UK’s largest energy companies, has called for green levies to be transferred to general taxation. Write in the Sun, Chris O’Shea supported this would reduce bills by £170 ‘overnight’. He wrote that “Funding environmental costs through the bill means that every customer pays the same amount whether they are rich or poor”.
Some leading green energy advocates agree. Dale Vince, the top boss of green energy provider Ecotricity, described the levies as “a stealth tax” and argued that other industries, such as agriculture, railways and aviation , are subsidized by the taxpayer rather than directly by their customers.
Most analysts point out that environmental and social levies are a small and stable part of consumer bills, and that the affordability problem is squarely the result of rising gas prices. However, there are arguments in favor of transferring these burdens to general taxation, says Josh Emden, a researcher at the Institute for Public Policy Research (IPPR), a centre-left think tank. He cites a 2018 UK Energy Research Center study which found that financing low-carbon transition programs from taxation would reduce the costs paid by 70% of households.
“However, we would say that if you transfer that funding to Treasury, you would need a long-term commitment to continue to fund these programs,” he says. “That’s why you have Tory MPs supporting this, because they would like to see these measures removed altogether.”
Juliet Phillips, senior policy adviser at the E3G think tank, argues there is merit in shifting ‘legacy bonds’ – levies intended to subsidize the operation of renewable energy projects – to general taxation. She notes that because these are tied to long-term contracts signed by the government, they are unlikely to be cut in the annual budget process. “They have played a very important role over the years in launching a globally competitive renewable energy industry, but now is the time to bring them into general taxation as a more progressive way to cover their costs,” says- she.
Ed Birkett, head of energy and environment at the center-right think tank Policy Exchange, notes the important role of green levies in reducing overall system costs. “A lot of these green levies help reduce energy bills,” he says. “When you have more wind farms, you have lower wholesale electricity prices.” He also notes that the contracts for difference that now support renewable energy projects mean that the government receives payments from renewable energy producers when wholesale prices are high (in exchange for payments to producers when prices are low). . “This cushions the impact of rising gas prices,” he explains.
Like Policy Exchange noted in an article in October 2021, “any reduction in new renewable energy projects could actually increase energy bills”, as wholesale electricity prices are currently much higher than the cost of new offshore wind farms.
In addition to renewables, other elements of the low-carbon transition also require financing, including the decarbonisation of heat. Here, improving the insulation of the UK’s aging housing stock is a priority, and the UK needs to dramatically accelerate the replacement of gas boilers with heat pumps from around 30,000 last year to around one million a year by the end of the decade. This would require £3bn of support every year by 2030, according to Green Marine projections.
There was a clear case for investing in these measures amid the economic recovery from the Covid-19 pandemic, Emden tells IPPR, and now, with a crisis in gas prices, that case has become even more convincing. “The big problem is that these technologies still require significant upfront costs, although running costs will be lower,” he says. The IPPR asks for low-cost loans and subsidies for the poorest households.
Phillips at E3G identifies a few potential funding sources. Firstly the UK Green Gilts program is set to raise £16bn through the government’s sale of green bonds over the next three years. In addition, the recently established Infrastructure Bank in the UK could provide concessional loans to banks or local authorities, she suggests, particularly for greening homes. “This is probably one of the biggest climate investment gaps,” she says.
Medium term models
These measures will take years to seriously affect consumer energy costs. In the meantime, there is broad consensus on the need for targeted support to the poorest households. In the medium term, other countries are proposing alternative models for financing the low-carbon transition.
In Germany, the new “traffic light” coalition government plans to phase out the tax on renewable energy sources (EEG), the charge on electricity bills that has financed the dramatic expansion of electricity capacity. renewable energy in the country over the past two decades. This tax rose from around €0.1 per kilowatt hour (i.e. 5% of the total) in 2007 to almost €0.7 in 2017 (24% of the total), raising around €25 billion per year to subsidize the wind and solar energy.
By 2023, the EEG tax will end, with the government instead funding the ongoing energy transition from Germany’s new emissions trading system, which introduces a carbon price on home heating and fuel transport. This is a recognition that the focus of decarbonization must now shift from the electricity sector – which is already 45% renewable energy and aims for 80% by 2030 – to transport and heater.
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It is also recognition that the EEG has achieved its goal in terms of increasing renewable energy capacity and reducing its costs, says Thorsten Lenck, senior partner for electricity market design and energy to German think tank Agora Energiewende. The goal now is to raise fossil fuel prices while lowering the cost of electricity, he says.
Politics and Politics
However, while the change may be good policy, whether it turns out to be good policy remains to be seen. While the EEG levy will be phased out, bills themselves are unlikely to fall due to rising wholesale electricity prices passing through to consumers. “It would be better if electricity bills overall went down,” notes Lenck.
In Germany, too, support will be needed to protect poorer households from rising wholesale energy prices, says Simon Müller, director for Germany at Agora Energiewende. However, “to guarantee favorable energy prices in the long term, the solution is to develop renewable energies. This is the way to make green technologies competitive and to successfully transition the German industrial base into the era of climate neutrality.
In the longer term, this is also the lesson for the United Kingdom. Any response to high fossil fuel prices that does not seek to reduce the country’s dependence on these fossil fuel prices is likely to fail.