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Why removing price caps from energy bills would reduce investments in renewable energies

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When Ofgem, the energy regulator, announced it was raising the price cap on energy bills on August 6, most of the policy discussion rightly focused on the 15 million households it protects (a disproportionate number of which are low-income) who could end up paying up to an extra £ 153 a year from October. With the end of measures designed to keep people out of poverty during the pandemic – such as the holiday scheme, the minimum income floor for universal credit, and the prevention of certain evictions – many households could face a gloomy winter. .

But the other concern, made more urgent by the publication of the IPCC report on the rapid evolution of the climate crisis, is that lifting the price cap is likely to reduce investment in renewable energy production at some point. where it couldn’t be more important.

The cap applies to the default plans (“standard variable tariffs”) that energy companies offer to their customers. These offers vary depending on the wholesale price of energy. In theory, this could mean consumers pay less, but gas prices are rising sharply.

The odd thing about price caps is that raising it – allowing energy companies to charge more – makes “Big Six” energy companies appear cheaper than before. Indeed, the business models of large energy providers involve losing money on their customers in the first year (paying over £ 100 per customer in many cases, including fees for price comparison websites. that facilitate change). After this first year, about half of these new customers will leave, tempted by a new offer. But the rest will remain, and after switching from the discounted offer to a standard one, they could start paying an additional £ 139 per year. Because companies can plan to make the most of those that remain, they can bid more competitively for the first year.

Useful for the Big Six, it makes it very expensive to keep in business as an energy supplier, as customers cost a fortune to acquire and are encouraged to leave by switching websites. In five years, 24 energy companies have gone bankrupt in the UK.

Smaller energy companies that focus on renewables, such as Bulb and Octopus Energy, support the price cap because they say squeezing the margins of energy suppliers is forcing them to look for other ways to save money. money, improving efficiency and investing in rapidly becoming cheaper forms of energy, such as onshore wind and solar.

Greg Jackson, CEO of Octopus Energy, told me he found “funny that energy companies who complain about the price can say it’s a barrier to innovation – and yet I’d like to ask them to point out all the innovations they made in the two decades before the price cap. There were none.

Ten years ago, the renewable energy industry warned that the Big Six were prioritizing gas investments (and also lobbying for gas to be seen as “green” or crucial for the energy transition). One of the results has been to keep declining renewable energy costs off household energy bills.

“The way the energy market works,” Jackson said, “is that the vast majority of renewable energy production is sold to energy companies under a contract that indexes price to price. of the electricity market – and the market price of electricity is defined by the price of gas… All renewable energy contracts are indexed to this price. This means that consumers do not see the benefits of the reduction renewable energy costs.

[See also: “Dangerous climate change has arrived”: IPCC report is warning to world ahead of COP26]

Where the Big Six have innovated is by offering “green” tariffs that sell electricity powered by gas, but which they can claim as 100% renewable because they come with certificates of guarantee of origin, purchased overseas, which indicate that an equivalent amount of clean energy has been brought into the UK. As explained in a study published by Good Energy last October, “these certificates allow suppliers to avoid financial contributions to UK renewable energy programs”. The workaround means that increased consumer demand for green energy is actually leading to less construction of solar and wind farms in this country.

Jackson says the higher price cap isn’t the only regulatory barrier to investing in renewables: “Twenty-three percent of the typical electric bill is taxes – they’re environmental and social levies.” . Companies that do not receive subsidies on their production should not pay taxes for the levies, since the levies are there to subsidize the production of renewable energy. We must increasingly open up energy production to investors who really want to build, on a colossal scale, the production that will allow the system to become clean.


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