Ellie Standen explains how levies break, dividends divide and it’s time to take back the power industry into the public sector.
Keir Starmer’s Labour Government has promised great things in terms of energy prices — lower bills for good from a zero-carbon electricity system by 2030. It’s a fantastic aim that should be possible to deliver, but as with all large-scale systemic changes, it won’t be without its costs or problems.
So how will they achieve this? In the manifesto, there are commitments to make changes in all market areas (see box Summary of Labour’s energy manifesto). These proposals are in line with a philosophy that harkens to the days of Blair and Brown, with the underpinning belief that the private sector, appropriately regulated, will deliver what is required in partnership with the Government. Key parts of the plan include the creation of Great British Energy, a public investment partner in renewable energy and energy storage. This will need to have far greater levels of investment than previous incarnations, such as the Green Investment Bank. They propose that regulation be more stringent to avoid windfall profits for energy companies and keep bills low. They promise to address the significant issue of delays in connecting new generating capacity to the electricity grid, as projects in the planning stages cannot get connections until the late 2030s.
- Great British Energy, effectively an investment partner in private sector investment in renewable energy and energy storage, has shades of the Green Investment Bank first launched under Brown & Darling in 2007.
- Keeping a strategic reserve of flexible gas power plants that can easily and cheaply meet demand at times of low renewable generation is a sensible move for the current system.
- There are no new oil and gas exploration licences in the North Sea. This sounds laudable but is largely irrelevant. The carbon and energy sources issue is the number of production licences that could still be granted on fields already explored.
- Labour promises to reduce bills and tackle windfall profits from oil and gas companies by closing loopholes in the Energy Profits Levy. They will also reform the “broken energy market” – a manifesto reference to energy suppliers. The plan seems to be to regulate to reduce standing charges, improve customer service, and “attract the investment needed to cut bills.”
- They have promised to work with industry to upgrade our National Transmission system. New electricity generators of any significant size (including renewables) need a connection to the nation’s transmission system, and the current backlog means that current plans for new generation capacity are not being offered connections until the late 2030s, which means they are being put on hold.
- The Warm Homes Programme will provide investment in energy efficiency and other technology. However, despite a planned major house-building programme, no net-zero carbon standards for new homes have been proposed.
- Support nuclear energy and other low-carbon technologies such as hydrogen and carbon capture and storage.
So, will this be enough to reduce bills, and if not, how else might they be lowered? The government has capped current domestic electricity prices at 22.4 p/kWh, with standing charges of 60p/day. Figure 1 shows a breakdown of the cost components contributing to these prices. The three largest cost components are wholesale electricity, environmental and social obligation, and network costs. Let’s look at these components and consider how the Government could reduce consumer costs in each area.
Wholesale electricity costs (30%) are affected by many factors (See Box What determines the wholesale price of electricity?). Still, in simple terms, they represent the cost of electricity production and the balance between supply and demand. Demand reduction and energy efficiency measures will always help with energy costs, so it’s important that the Government continues to support these.
Whilst the gas price and the cost of producing electricity from gas dominates the electricity price, other factors also influence the price:
- Cold weather increases demand.
- Low winds reduce the supply from wind generators.
- Power station outages reduce supply.
The market cost for electricity is still dominated by gas prices, which have surged since Russia invaded Ukraine (see Fig 2). The increasing proportion of renewable electricity in the UK grid (in 2023, 46% of the UK’s electricity production was from renewables) has kept wholesale prices lower than they would have been, as the cost of wind production in the UK is less than gas-produced electricity. Increasing the amount of renewable energy will help keep costs low. To ensure the system can supply electricity when needed a number of energy storage or other technologies will be needed to fill in gaps from intermittent renewable energy sources.
network constraints hampered the ability to increase the amount of renewable energy, energy storage, and other technologies
However, network constraints hamper the ability to increase the amount of renewable energy, energy storage, and other technologies. So, let’s look at network costs, which account for around 23% of bills. These cover the cost of maintaining and upgrading the transmission and distribution lines that transport electricity from generators to consumers. National Grid is the electricity system operator and owns the transmission system. They must tackle the huge backlog of applications for renewable connections, which will be key to delivering increased renewable electricity generation.
National Grid is a publicly listed company that paid dividends of £1.4 billion in 2021. In 2019, Labour developed a plan to nationalise the electricity grid and the retailers – the Big Five (British Gas, E.ON, EDF, Scottish Power and Ovo), which dominate the retail energy market. Nationalising the grid could be a fiscally-neutral option if shares are traded for Government bonds, as the revenue-generating asset acquired would more than cover the bond yield. Other options also exist that could better align a utility company’s legal and governance structure with its purpose of serving the public; for example, Welsh Water in 2001 was turned into a company limited by guarantee, designed to serve its customers, with no dividends paid. The performance of Welsh Water compared to other UK water companies was analysed in 2021 and shown to be a sector leader on several indicators, including keeping bills low. This type of structure means that the company remains off the Government balance sheet but that profits can go directly to reducing bills and funding investment in renewables and connections.
Taxing electricity is extremely regressive; poorer households spend a much larger proportion of their incomes on electricity than richer households.
Finally, let’s look at the environmental and social obligations. These are obligations that the Government places on large retailers to meet carbon reduction targets and reduce bills through energy efficiency schemes. The retailers can pass the costs of the obligations onto consumers, and therefore, the policy effectively acts as a tax on electricity usage. Taxing electricity is extremely regressive; poorer households spend a much larger proportion of their incomes on electricity than richer households. They also reduce the savings from moving from gas boilers to heat pumps for household heating despite the latter’s significant efficiency gain (see box Pumped Up).
Heat pumps are four times more efficient than gas boilers and, therefore, produce significant CO2 savings (around 2.5 tonnes/year), even when the electricity is generated partially from gas. However, they are more expensive to install, with the Energy Saving Trust estimating the capital cost of installation as £14,500, depending on the amount of work to be done. To accelerate the uptake of heat pumps, the government offers a £7,500 grant for these installation costs, and some energy suppliers are offering significantly lower installation costs, starting from £500.
The large price differential between electricity and gas bills means that consumers are not getting the full financial benefit of a heat pump’s efficiency. The current average annual saving of running a heat pump is around £100/year compared to a medium-rated gas boiler. However, this would be substantially larger if the levy regime were abolished, reducing the need for a capital grant.
These policies were introduced in the early 2000s and have remained attractive to politicians as a way of funding green policies without having to raise general taxation. They also show the difficulties of placing windfall taxes on energy companies, as shareholder-owned companies pass the cost of any taxes or new costs onto consumers. These levies have fallen as a proportion of electricity bills in the last two years, from 25% based on 2021 data to 12% based on 2023 data, and have been fixed by the energy price cap at c. £180 per household in 2024. Whilst it could be argued that there is a justification for charging for energy efficiency schemes that reduce energy costs, most of these schemes will help more with gas bills than electricity bills. There is little justification for funding these Government policies from electricity bills as opposed to general taxation.
So, several actions could be taken to reduce bills significantly. Taking back ownership of our electricity system would allow the surplus currently paid to shareholders (many overseas institutional investors) to reduce bills and invest in the system to facilitate renewable energy connections to meet zero carbon targets. Levies on bills for which there would be no reason under public ownership should be scrapped immediately and funded through fairer means. Without a fundamental change in our electricity system, the aims of lower bills and cleaner energy will be very hard to meet.
