My attempt to split out the gas and carbon costs from 2012-2025 for a UK combined cycle gas turbine. Now that coal has left the UK grid, carbon taxes on electricity generators should be re-examined.
The disadvantages of reducing/removing carbon taxes sum things up! The Government's tax revenue will decline (leading to spending cuts or increased taxes elsewhere) and the energy transition will slow. I certainly don't regard these things as advantages! The only significant advantage I can see of reducing carbon taxes is a temporary, small reduction of electricity prices. However, this advantage will decrease with time as gas use decreases anyway. BTW wholesale prices are more like 45% of the total electricity price at the moment if you exclude VAT - the size of VAT is dependent on the sizes of the elements that make up the bill. See my Figure 2 in my post at https://davidtoke.substack.com/p/how-cheaper-batteries-and-renewables
Very valid pushback - I don't think the hit to government taxation income would be all that substantial - as i'm assuming the government also uses quite a lot of electricity- which would be a helpful offset.
And I agree that the percentage of the time that gas sets the marginal price will decrease - already seeing it on sunny days and on weekends in particular.
As for slowing the energy transition - the problem I'm wrestling with is "which bit" of the energy transition. If I split it into "decarbonising electricity supply" and "electrifying most of the rest" I'm finding myself less concerned with the ability to decarbonise the grid on a 25 year view (other European countries have already done so) than I am on electrification - which relies on consumers and businesses wanting to adopt electrification technologies. Heat pump maths arent obvious to me on a purely economic basis (Im currently paying c. 22.7p per KWh of electricity and 6.3p per KWh of gas)
If the government is serious about lowering energy prices it would abolish Renewables Obligations (RO) immediately. For a typical household bill of £912.62 [1] ROs add 11.4% or £104 (for a QRD [2] or Legislation [3]).
The RO scheme requires electricity suppliers to source a certain portion of their supply from renewable generation. In practice, this means suppliers must obtain a set number of Renewables Obligation Certificates (ROCs) for each unit of electricity they sell, if not they face penalties.
There are 2 mechanisms by which the Renewables Obligation Order 2015 [3] determines the supply of ROs, and in typical Whitehall fashion this involves creating an illusion of scientific rigour through a convoluted calculation, in which multiple constants multiply varying values, transparently devised to yield a predetermined outcome without any empirical justification. And of course the highest calculation is chosen (another brilliant Whitehall scheme to marketise out equations for highest output).
Currently, the obligation level for suppliers in England and Wales for 2024–2025 is set at 0.490 ROCs per megawatt-hour. To remove this horrendous cost and reduce bills, the Secretary of State for the Department for Energy Security and Net Zero could immediately exercise statutory powers under the Electricity Act 1989 to amend the Renewables Obligation Order 2015, explicitly setting the RO level to zero (yes zero) through a straightforward statutory instrument.
Is this legal? Yes, absolutely. But what about renewable generators' returns? Let me state that the fundamental purpose of an energy system is to reliably and affordably provide energy to end users, not to endlessly sustain inflated profits within the energy sector. High energy costs benefit the energy industry but they impose broader harm on the overall economy. Anyone prioritising returns for renewable producers effectively prioritises higher energy costs, placing the health of the wider economy in jeopardy (see the destruction of the chemicals industry, steelmaking, ceramics, I despair to go on...). If we truly value economic prosperity, we should celebrate reduced margins in the energy sector, so that the energy system serves the economy rather than dominating it.
Thanks for the comment - and the detail on the ROC's scheme (Which I have only looked at from the generators side with respect to offshore wind)
I think I share some of your frustration with the ROC's scheme - I don't like the duration, the cost plus mechanism or the RPI linkage and was pretty dismayed to find out that the most expensive offshore wind ROC's only fade out by the early to mid 2030's. [1]
Having said that, even if its legally possible, I'm not sure the government can or should renege on its ROC obligations in such a material way - assuming they want any future generation projects to be built, I think they have to honour that commitment.
There might be roundabout ways of adjusting it - e.g. the electricity generator levy undermines the non ROC revenue component. And arguably my proposal to reduce or remove carbon taxes would have a similar effect.
Aint going to happen would require Milibrain to acknowledge that its renewables that are driving up the cost of bills. Furthermore will stall anymore investment in renewables if companies believe govt will change the rules of the game.
Instead of cutting carbon tax, I think it would be better to cut other taxes on labour for instance or VAT on electricity. To keep the incentive to Decarbonize and lower the tax burden where it harms the most
I would certainly be open to removing/reducing the VAT from electricity - I think its at a fairly low rate of 5% for residential households, but still directionally helpful to remove it
This is a very interesting idea; thank you, Ed. It is obvious how this cuts costs for the consumer and the private sector, but do you think there is a case that it cuts costs for the Government, too? Apart from the fact that the public sector also uses energy, is there an argument to be made about how this could alleviate the capital we need to invest in electrification?
Its a great question - and my hunch is that it wouldn't cost the government much at all.
I will attempt some very ballpark maths which will have lots of errors...
UK CCGT generation averaged about 8.2 GW last year. 8.2 * 24 * 365 = c. 71,800 GWh. Average carbon taxes between CPS and ETS around £20 per MWh so call it £1.4bn of tax estimated.
I'm guessing getting rid of ETS and CPS would reduce retail electricity prices by 7% ish (which might be too high- but ballpark £20 carbon saving on wholesale price say 80% of the time, but overall retail cost is £220 ish per mwh)
1. Direct government use - no idea what the number is but maybe 20% of total electricity use? So maybe 57 TWH. Save £16 per MWh and its £900m of annual savings...
2. Alleviating electrification capital (your actual question!) - would need to think it through, but suspect the biggest benefit is you make EV's and heat pumps a bit more attractive in terms of running costs - therefore you might not need as big a subsidy to drive adoption? (Or you just enjoy a faster rate of adoption for the same money spent)
3. Index linked GILTS - UK has a big stock of index linked gilts which I think are still indexed to RPI. Might get a one time benefit from a mechanical lowering of inflation (not going to attempt to guess at the benefit... - but lower inflation should be helpful for the government finances in terms of wider interest savings.
Would be interesting to see how the OBR would score it as a policy - not impossible it is close to self financing without considering the growth benefits.
Decarbonisation 100% is impossible. It is a myth that the more intermittent energy you build supply, will allow removal of all FF. Eventually, hopefully soon, governments will realise this, we should use every last drop of FF at our disposal and start planning for the next generation of despatch-able energy, it is not solar and wind.
Your statement that gas generators set the price of electricity is misleading. The price of wind, solar and wood burning power is set by fixed contracts. The market price for power from those sources is topped up by subsidies to match their fixed contract price.
The only price set by gas is the price paid to the gas generators.
The market auction isn't a real auction, the renewables can bid low to ensure they get the right to feed the grid, knowing their bid will be topped up to their contract price. The market auction is not a price setting exercise, it is a mechanism designed to ensure that renewables get priority feed in rights.
The myth that gas sets the price of electricity is a statement put out by supporters of wind and solar to divert attention from their real costs
well stated this need repeating and repeating and repeating until we get cut through and if only a few of the anti NZ MPs would stop point scoring and start backing asking Milibrain and his cohort the awkward questions we may get some breakthrough that starts to wake people up that things aren't what they seem.
Govt raised 1.8b in FY24/5 from carbon taxes so given recent setbacks on fiscal policy measures can't see this being reduced anytime soon. Truth is though its adding cost to the price of electricity and presumably indirectly a portion of it is returned in subsidies for heat pumps although that largely benefits well off people anyhow. All the other subsidy schemes ie warm home discount etc is funded through bills.
What should be spelt out is its another reason for our higher electricity costs which in the short term will only reduce if the price of wholesale gas drops back which seems to have reached a plateau unless Trump or the Middle East decide to be stupid. Even then there was no long term impact a few days wobble. There is the possibility that gas prices will drop back as more LNG comes on line through 26/27 but gas is still the main route to shifting away from coal so even where demand is dropping away like the UK its being replaced elsewhere.
The disadvantages of reducing/removing carbon taxes sum things up! The Government's tax revenue will decline (leading to spending cuts or increased taxes elsewhere) and the energy transition will slow. I certainly don't regard these things as advantages! The only significant advantage I can see of reducing carbon taxes is a temporary, small reduction of electricity prices. However, this advantage will decrease with time as gas use decreases anyway. BTW wholesale prices are more like 45% of the total electricity price at the moment if you exclude VAT - the size of VAT is dependent on the sizes of the elements that make up the bill. See my Figure 2 in my post at https://davidtoke.substack.com/p/how-cheaper-batteries-and-renewables
Very valid pushback - I don't think the hit to government taxation income would be all that substantial - as i'm assuming the government also uses quite a lot of electricity- which would be a helpful offset.
And I agree that the percentage of the time that gas sets the marginal price will decrease - already seeing it on sunny days and on weekends in particular.
As for slowing the energy transition - the problem I'm wrestling with is "which bit" of the energy transition. If I split it into "decarbonising electricity supply" and "electrifying most of the rest" I'm finding myself less concerned with the ability to decarbonise the grid on a 25 year view (other European countries have already done so) than I am on electrification - which relies on consumers and businesses wanting to adopt electrification technologies. Heat pump maths arent obvious to me on a purely economic basis (Im currently paying c. 22.7p per KWh of electricity and 6.3p per KWh of gas)
If the government is serious about lowering energy prices it would abolish Renewables Obligations (RO) immediately. For a typical household bill of £912.62 [1] ROs add 11.4% or £104 (for a QRD [2] or Legislation [3]).
The RO scheme requires electricity suppliers to source a certain portion of their supply from renewable generation. In practice, this means suppliers must obtain a set number of Renewables Obligation Certificates (ROCs) for each unit of electricity they sell, if not they face penalties.
There are 2 mechanisms by which the Renewables Obligation Order 2015 [3] determines the supply of ROs, and in typical Whitehall fashion this involves creating an illusion of scientific rigour through a convoluted calculation, in which multiple constants multiply varying values, transparently devised to yield a predetermined outcome without any empirical justification. And of course the highest calculation is chosen (another brilliant Whitehall scheme to marketise out equations for highest output).
Currently, the obligation level for suppliers in England and Wales for 2024–2025 is set at 0.490 ROCs per megawatt-hour. To remove this horrendous cost and reduce bills, the Secretary of State for the Department for Energy Security and Net Zero could immediately exercise statutory powers under the Electricity Act 1989 to amend the Renewables Obligation Order 2015, explicitly setting the RO level to zero (yes zero) through a straightforward statutory instrument.
Is this legal? Yes, absolutely. But what about renewable generators' returns? Let me state that the fundamental purpose of an energy system is to reliably and affordably provide energy to end users, not to endlessly sustain inflated profits within the energy sector. High energy costs benefit the energy industry but they impose broader harm on the overall economy. Anyone prioritising returns for renewable producers effectively prioritises higher energy costs, placing the health of the wider economy in jeopardy (see the destruction of the chemicals industry, steelmaking, ceramics, I despair to go on...). If we truly value economic prosperity, we should celebrate reduced margins in the energy sector, so that the energy system serves the economy rather than dominating it.
[1] https://www.electricitybills.uk/
[2] https://en.wikipedia.org/wiki/Renewables_Obligation_(United_Kingdom)
[3] https://www.legislation.gov.uk/ukdsi/2015/9780111138359/pdfs/ukdsi_9780111138359_en.pdf
Thanks for the comment - and the detail on the ROC's scheme (Which I have only looked at from the generators side with respect to offshore wind)
I think I share some of your frustration with the ROC's scheme - I don't like the duration, the cost plus mechanism or the RPI linkage and was pretty dismayed to find out that the most expensive offshore wind ROC's only fade out by the early to mid 2030's. [1]
Having said that, even if its legally possible, I'm not sure the government can or should renege on its ROC obligations in such a material way - assuming they want any future generation projects to be built, I think they have to honour that commitment.
There might be roundabout ways of adjusting it - e.g. the electricity generator levy undermines the non ROC revenue component. And arguably my proposal to reduce or remove carbon taxes would have a similar effect.
[1] https://wattdirection.substack.com/p/uk-offshore-wind-revenues-per-mwh
Aint going to happen would require Milibrain to acknowledge that its renewables that are driving up the cost of bills. Furthermore will stall anymore investment in renewables if companies believe govt will change the rules of the game.
Instead of cutting carbon tax, I think it would be better to cut other taxes on labour for instance or VAT on electricity. To keep the incentive to Decarbonize and lower the tax burden where it harms the most
I would certainly be open to removing/reducing the VAT from electricity - I think its at a fairly low rate of 5% for residential households, but still directionally helpful to remove it
This is a very interesting idea; thank you, Ed. It is obvious how this cuts costs for the consumer and the private sector, but do you think there is a case that it cuts costs for the Government, too? Apart from the fact that the public sector also uses energy, is there an argument to be made about how this could alleviate the capital we need to invest in electrification?
Its a great question - and my hunch is that it wouldn't cost the government much at all.
I will attempt some very ballpark maths which will have lots of errors...
UK CCGT generation averaged about 8.2 GW last year. 8.2 * 24 * 365 = c. 71,800 GWh. Average carbon taxes between CPS and ETS around £20 per MWh so call it £1.4bn of tax estimated.
I'm guessing getting rid of ETS and CPS would reduce retail electricity prices by 7% ish (which might be too high- but ballpark £20 carbon saving on wholesale price say 80% of the time, but overall retail cost is £220 ish per mwh)
1. Direct government use - no idea what the number is but maybe 20% of total electricity use? So maybe 57 TWH. Save £16 per MWh and its £900m of annual savings...
2. Alleviating electrification capital (your actual question!) - would need to think it through, but suspect the biggest benefit is you make EV's and heat pumps a bit more attractive in terms of running costs - therefore you might not need as big a subsidy to drive adoption? (Or you just enjoy a faster rate of adoption for the same money spent)
3. Index linked GILTS - UK has a big stock of index linked gilts which I think are still indexed to RPI. Might get a one time benefit from a mechanical lowering of inflation (not going to attempt to guess at the benefit... - but lower inflation should be helpful for the government finances in terms of wider interest savings.
Would be interesting to see how the OBR would score it as a policy - not impossible it is close to self financing without considering the growth benefits.
Decarbonisation 100% is impossible. It is a myth that the more intermittent energy you build supply, will allow removal of all FF. Eventually, hopefully soon, governments will realise this, we should use every last drop of FF at our disposal and start planning for the next generation of despatch-able energy, it is not solar and wind.
Your statement that gas generators set the price of electricity is misleading. The price of wind, solar and wood burning power is set by fixed contracts. The market price for power from those sources is topped up by subsidies to match their fixed contract price.
The only price set by gas is the price paid to the gas generators.
The market auction isn't a real auction, the renewables can bid low to ensure they get the right to feed the grid, knowing their bid will be topped up to their contract price. The market auction is not a price setting exercise, it is a mechanism designed to ensure that renewables get priority feed in rights.
The myth that gas sets the price of electricity is a statement put out by supporters of wind and solar to divert attention from their real costs
well stated this need repeating and repeating and repeating until we get cut through and if only a few of the anti NZ MPs would stop point scoring and start backing asking Milibrain and his cohort the awkward questions we may get some breakthrough that starts to wake people up that things aren't what they seem.
Govt raised 1.8b in FY24/5 from carbon taxes so given recent setbacks on fiscal policy measures can't see this being reduced anytime soon. Truth is though its adding cost to the price of electricity and presumably indirectly a portion of it is returned in subsidies for heat pumps although that largely benefits well off people anyhow. All the other subsidy schemes ie warm home discount etc is funded through bills.
What should be spelt out is its another reason for our higher electricity costs which in the short term will only reduce if the price of wholesale gas drops back which seems to have reached a plateau unless Trump or the Middle East decide to be stupid. Even then there was no long term impact a few days wobble. There is the possibility that gas prices will drop back as more LNG comes on line through 26/27 but gas is still the main route to shifting away from coal so even where demand is dropping away like the UK its being replaced elsewhere.