Balancing act | Shifting policy costs in a just way

As the government looks at rebalancing energy policy costs, the most vulnerable members of society are at risk of being hit hardest by proposed changes. Tony Ballance, chief strategy & regulation officer at Cadent, writes for Utility Week on the importance of getting public buy-in before making hasty decisions.  

When we consider all the things that need to happen to deliver a reliable net zero energy system, what springs to mind the most are the important questions of how we are going to pay for this vital transition – and who is going to bear these costs. At the moment, many of the costs of the energy transition are covered by something that the government calls ‘policy costs’. These are charges added to everyone’s electricity and gas bills to pay for large government programmes covering policies that support things like those living in fuel poverty, renewable energy generation and insulation programmes.

Currently these policy costs are split between electricity and gas bills based on which energy type benefits from the policy. For example, the subsidies that exist to support offshore wind renewable electricity generation are added to electricity bills, the subsidy to support green gas production is added to gas bills and smart meter costs are split between the two. In analysis done by Cadent, we found that annual policy costs by 2025 could amount to £177 a year on electricity bills and £38 on gas bills for the average dual fuel customer.

In our paper on ‘How to pay for Energy Policy’ we consider the implications of these policy cost changes and how changing the way that we levy them on bills may impact consumers and their ability to pay for future energy. This paper is timely, because the UK Government will consult on policy cost changes to improve the uptake of electrical heating systems by making electricity costs cheaper. The aim is to improve the payback of technologies like heat pumps in comparison with existing gas boilers, thereby incentivising people to switch to such technologies. One of the options that some are therefore proposing is that electricity policy costs are shifted from electricity bills on to gas bills. This would mean gas consumers pay for all or a significantly higher proportion of the energy policy costs regardless of whether they benefit from the policy.

There are, however, significant consequences of shifting policy costs from electricity consumers to gas consumers. While it may make electricity cheaper, it is inconclusive that this will be sufficient to encourage the uptake of heat pumps for home heating. Heat pumps have a known range of other challenges associated with installation – driven broadly by installer competency and disruption to the home. Lower running costs may help to compensate for some of these barriers but will not overcome them entirely.

Further issues arise from the fact that there are less gas consumers than electricity and therefore a smaller base to spread these policy costs over. As consumers disconnect from the gas network, there will be a diminishing number of customers to spread rising policy costs over. This will disproportionately impact on consumers in vulnerable situations, and those in fuel poverty – who through no fault of their own cannot afford to electrify their homes and will need protection. Many would probably see such a move as extremely unfair, as you are asking those least able to afford the transition to support those who are often best able to do so. In this case shifting policy costs from electricity to gas would seem regressive if these customers are not protected. Shifting all policy costs to gas would result in gas consumers paying an eye-watering £1,045 per year by 2035 with electricity consumers paying none.

The impact of re-balancing today’s policy costs between electricity and gas consumers is comparatively small in comparison to how this may impact on bills in the future. This must be very carefully considered so that it is fair for all over a longer time frame. If we are to ensure continued public support for the transition to net zero, it is essential that public policy decisions are seen as fair and equitable. If they are not, then public support will be negatively impacted.

The government has said that it is considering consulting the public on the future of policy costs. We would encourage as part of that, consideration of some costs potentially shifting to general taxation as the costs of delivering net zero begin to increase – given that these costs are essentially societal ones.

This would not only avoid accusations that the government is putting up customer bills at a time when people’s budgets are tight, but also ensure that any changes to the current system are seen as fair and just. This is not straightforward, however, given the government’s fiscal position.

Our conclusion from this analysis is that the costs to transition to net zero will create a huge load on all consumers – whether it be electricity or gas consumers. It will create a particularly high burden as it does today for those in vulnerable situations and the fuel poor.

The discussion on how net zero will be paid for appears to be relatively immature with limited transparency for consumers – meaning that the whole picture is difficult to gauge. We would welcome more open discussions on the costs and means to fund the delivery to net zero, such that we do not find unnecessary ‘cliff edges’ that ultimately may cause government to have to row back on positive ambitions.