REFs study of the likely impact of climate change policies on the affordability of energy concludes:
1. Current renewable electricity policies intended to meet the EU Renewables Directive in 2020, will impose extra consumer costs of approximately £15bn per annum, which is roughly equivalent to 1% of current GDP. This annual total is comprised of approximately £8bn in subsidy, £5bn in grid integration, and a further £2bn in VAT charged on these extra costs.
2. Slightly less than one third of this annual cost (£4.5bn) will be recovered from domestic households through their energy bills, at an average cost of about £170 per household.
3. This burden will increase the risk of hardship over the entire population, with very significant increases for those on lower incomes.
4. There is particular concern that the 2.5m households currently using electricity for their primary means of heating will be exposed to a very significant increase in risk of hardship, spending as much as £320 a year extra on space heating alone.
5. About two thirds (£10bn) of the policy cost would be charged to industrial and commercial consumers, with implications for the cost of the goods and services provided by those businesses, and thus with indirect effects on domestic households via cost of living.
6. The policy cost burden will also degrade industrial competitiveness, with negative effects on wages and employment rates, thus having an indirect downward pressure on average household income.
Amongst its recommendations the study suggests that:
a. VAT should not be charged on the climate change policy subsidies levied via energy bills, which should also include a full statement of all environmental levies.
b. Government should identify those using electricity for heating and enable them to switch to gas where possible, and to subsidised renewables for heat in other cases.
c. Government should reconsider the current use of levies on the competitive sectors of the energy markets to fund environmental programmes. Such measures are not only regressive, having a disproportionate effect on low-income households, but they also impair market efficiency, thus increasing costs.
d. Rather than employing a binary definition of fuel poverty (i.e. in or out of fuel poverty) Government should recognise that its costly policies further expose already fragile household budgets and make them vulnerable to shocks, such as unemployment or reduced income, and thus have an impact on the population wide risk of hardship, which our study describes as the probability that households fall into actual hardship, including both physical and mental ill health, as the result of unaffordable energy.
e. Energy suppliers are not natural agents for delivering the fuel poverty agenda through energy efficiency programmes, and should not be forced into this role, which instead should be assigned to more appropriate, perhaps non-commercial, bodies, with the energy suppliers left to concentrate on their core business, the supply of energy at competitive prices.
f. While energy efficiency programmes for low income housing should continue, such measures should not be funded from levies on energy bills, as at present, but from general taxation, which would avoid regressive effects on low income households.
g. Energy efficiency products and building work to install them should be exempted from VAT or 0% rated.
h. It is critical that subsidised energy efficiency programmes are very carefully monitored and the resulting data made public to ensure that expected savings and/or benefits are delivered, and to accelerate market learning and increase the up-take of the most successful measures.
i. District heating has been unreasonably neglected, and its potential should be re-examined, particularly in relation to the use of waste heat from power stations, with a focus on the replacement of electric heating systems, and the supply of commercial premises and high rise flats in areas with concentrated heat loads.