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Cost of Energy Review: will it deliver lower bills?

Yesterday, BEIS announced details of its ‘Independent review to ensure energy is affordable for households and businesses’.  Here are my initial thoughts on whether or not it will deliver lowest cost, sustainable energy services for consumers.

First the ambition: the government defines this as ‘for the UK to have the lowest energy costs in Europe, for both households and businesses’.  Assuming that they mean energy service costs, rather than fuel costs, I have no problem with that as a starting point.  But, looking at the detail, I do have one or two concerns.

The review will be led by Prof. Dieter Helm and will look at how the cost of electricity can be kept as low as possible, as we meet our climate targets.  Which is my first concern: is electricity really the only form of energy that we should be concerned about?

No, it isn’t.  Electricity use accounted for only 17.5% of final energy use in 2016 (DUKES, 2017), whilst gas accounted for nearly 30% and petroleum products almost half of total use.  Of course, for this review we are interested in the cost to the consumer, rather than the amount used.  And electricity costs are dominant for industrial and commercial users.  But in homes, expenditure on gas and electricity account for roughly equal shares of the money spent.  And for our transport, virtually all our fuel expenditure is on petroleum products.  So, shouldn’t the review be looking at the costs to consumers of all energy services, not of any given fuel?

Perhaps those who defined the scope of the review believe that the future is all-electric.  Indeed, a report published last Thursday by Forum for the Future included the following quote from Prof. Helm:

‘Decarbonisation should eventually bring about the end of fossil fuels, but they face a much more immediate threat.  That threat is digitalisation. Everything digital is electric.  The future of energy is therefore electric too.’

And we have seen recent government announcements of future bans for fossil-fuelled vehicles, albeit 20 years hence.  So, perhaps we are heading towards an all-electric energy system.  But what about heat?  Will this become all-electric?  And, if so, how quickly?  National Grid’s Future Energy Scenarios 2017 offers four future scenarios, and in only one of these (admittedly, the one in which we meet our climate aims) does gas use in homes decrease dramatically.  Even in this scenario, the replacement of gas takes more than 30 years. And, surely, the next 30 years of consumers’ energy bills is something that we should be thinking about.

Which brings us to my second concern: the review ‘will consider the whole electricity supply chain – generation, transmission, distribution and supply’.  What about demand?  As we all know, one of the most cost-effective ways to reduce consumers’ energy costs is to reduce the amount of energy they have to buy.  Indeed, in the National Grid scenario, one of the main drivers that reduces gas demand is the fact that consumers ‘live in housing stock that is good at retaining heat’.

The terms of reference do give some hope.  They state that the review will consider ‘the key factors affecting energy bills’, and energy efficiency is included in the list.  The question is whether demand reduction and response – particularly for heat and transport – will be given sufficient weight, given the clear emphasis on the electricity supply system in the minds of those who have shaped the review.

If the review does not fully consider the costs and benefits of energy demand reduction, it will not deliver on the government’s aim of the lowest bills for consumers.

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