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Ofgem and the family bill

Bob Ward is trumpeting the latest propaganda sheet from Ofgem, which details the costs of environmental legislation on energy prices. The impact, he claims, is only around 10% of the average household bill.

Here's Ofgem's leaflet, and here are the relevant paragraphs:

Energy Company Obligation (ECO): A new domestic energy efficiency programme designed to create a legal obligation on certain energy suppliers to improve the energy efficiency of domestic households. ECO is estimated to cost a typical consumer £27 per fuel each year.

The Renewables Obligation: A Government support mechanism for promoting large scale renewable electricity projects in the UK. Ofgem’s estimate is that the cost of this scheme this year is £21 out of your electricity bill (there is no impact on your gas bill for this programme). The cost of this scheme is expected to increase in April 2013.

Feed-in-Tariffs: Supports the switch from oil and gas fired heating systems to sustainable sources such as bio fuels, solar thermal panels, heat pumps and renewable combined heat and power. Ofgem estimates the cost of this programme is £6 out of your electricity bill (there is no impact on your gas bill for this programme).

Given the source for this information (and the intermediary!) we should obviously treat these numbers with a degree of caution. Having dug I little I think I can see how Ofgem works its magic. The trick lies in their presenting the impact of legislation on households. In the past, they have given some explanation of how they do this (see here).

What they seem to do is to take the total cost of the legislation, and to split it between domestic and non-domestic energy users on the basis of total electricity demand. Then they take domestic users' share of the total cost and divide it amongst the number of households. What this ignores, of course, is that energy price rises to non-domestic users get passed straight on to the domestic ones (except insofar as the energy is used by exporters). So while the costs of the legislation don't appear in your electricity bill, they will turn up in every other bill you have to pay.

Knowing this, one can try to estimate what the true cost to households might be. According to the document linked a couple of paragraphs above, non-domestic users represent about 62% of demand (the figures are for Scotland, but let's not quibble). So a 10% increase in fuel bills is driven by only 38% of the green cost. Let's guess that 50% of the 62% is passed on from non-domestic users to domestic ones (the remainder being passed overseas).  That would mean something like the equivalent of 10 x 88/38 = 23 percent of energy bills having to be borne by consumers.

Thanks greens.

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Reader Comments (16)

Raising taxes actually reduces bills, as Huhne patiently explains to Paxton (

Raising taxes, increases prices, which reduces demand, which reduces bills (by 7%). Simples.

Jan 23, 2013 at 7:38 PM | Unregistered CommenterZT

I'm reminded of that Private Eye cover circa 1989 which had Cecil Parkinson with a speech bubble: "Higher prices mean cheaper electricity for everyone'"

Jan 23, 2013 at 7:42 PM | Unregistered CommenterCapell

Thanks for pointing out the illusion.

Does Ofgem's figure also take into account the (unnecessary) cost of the fuels used to keep conventional power-generation 'on standby' for when the sun don't shine & the wind ain't blowing?

Jan 23, 2013 at 7:46 PM | Unregistered CommenterJoe Public

Some insight into DECC/OFGEM's calculations can be gleaned with a look at pg 26 of

As the table demonstrates, policies add £19 per MWh or 15% in 2011, rising to £139 or 27% in 2020.

This then translates into just a £5 increase in an average annual electricity in 2011, and negative £100 by 2020, because the DECC then subtract what they believe is the aggregate benefit of policies from the average bill.

Annexes E and F show what the DECC are including as benefits. Table F2 on page 68 shows that DECC believe the average consumer benefits £42 from CERT and EEC 1&2, £2 from Better Billing, £6 from WHD, £25 from Products Policy, and others (policies listed on page 49), netting a £5 reduction of a 2011 bill, and £100 of a 2020 bill.

And these are, of course, all assuming a high price of electricity (scenarios outlined on page 47), and high price of fossil fuels through to 2020 and beyond. So if we assume a lower cost of energy, DECC's sleight of hand falls apart even more.

Jan 23, 2013 at 8:35 PM | Unregistered CommenterBen Pile

And of course there is the even greater cost to UK PLC of businesses that cease to be viable because of the artificially inflated cost of energy. Thanks greens indeed.

Jan 23, 2013 at 8:36 PM | Unregistered CommenterN.Tropywins

Two things to remember here , the Greens have long thought that energy was to cheap and to easy to get in the first place . Although they tend to keep quite about the first idea these days , the reality is an energy shortage is not a 'bad thing ' from a green point of view especially if to can be brought about by price increases.

One last thing , Greens tend toward the mid to upper end of the income spectrum , guess why price increases due to handing out fat renewable subsides does not worry them to much .

Jan 23, 2013 at 9:00 PM | Unregistered CommenterKnR

Of course, if traditional energy costs crater (fracking anyone?), then even the admitted cost increase of going green is an enormous percentage.

Jan 23, 2013 at 9:12 PM | Unregistered CommenterJames

From the Ofgem leaflet 'The value of the permits traded under the European Union Emissions Trading Scheme (EU ETS) have also increased the costs of generating power. The EU ETS puts a price on pollution emitted by electricity generators and heavy industry and this is automatically reflected in the wholesale price of power. Our current estimate is that the EU ETS adds between £11-19 to the wholesale power price.' So before we even start, there are added environmental costs that they conveniently exclude.

Its all a triumph of sophistry and obfuscation.

Jan 23, 2013 at 9:53 PM | Registered CommenterPharos

Here is British Gas breakdown of costs:

Where does your money go?

38% Electricity bought from wholesale markets
26% Delivery to ho9me
19% Government obligations and taxes (include green levies).
12% Operating costs
5% Profit.

The 19% figure doesn't mean Government obligations are increasing bills by 19% it means they are increasing the bills by 23% (100*19/81).

Jan 23, 2013 at 10:54 PM | Unregistered CommenterTerryS

The next time a member of the Westminster Parish Council's executive team stands up and claims that the new "energy creation" schemes will generate xxxxxx jobs will someone please ask it why it will require the additional cost of so many extra workers just to produce more or less the same amount of electricity that is produced now. And have they accounted for this in their numbers, If so, where?

Jan 23, 2013 at 11:18 PM | Unregistered CommenterGrantP

All these numbers hurt my head and the only meaning that this old, cold head can glean is that UK government policy is to substantially reduce my energy consumption while increasing my fuel costs by the teeny-weenyist of margins.
That sounds wonderful but why is it that the arithmetic used to calculate what my energy-bills now cost me, bear no resemblance to that used to work out what I need to survive?
During my early adult years I learned that the prosperity of a nation was directly tied to the amount of available energy that it had at its disposal - a function, I wrongly thought, that was due to a sensible interplay between efficiency of use and capacity. Clearly the scientific consensus is now that GDP is independent of capacity (effectiveness) and solely reliant upon efficiency.
OK - I'd clearly confused effectiveness (doing the right things) with efficiency (doing things right) - but I am old - mea culpa (goggle? it if necessary) but can someone answer me this?
Can you toast bread on a smart-meter?

Jan 24, 2013 at 12:06 AM | Unregistered CommenterRoyFOMR

Huhne is right not to worry too much about bills, if they get too high he will probably get his wife to pay them

Jan 24, 2013 at 1:11 AM | Unregistered CommenterEternalOptimist

"The next time a member of the Westminster Parish Council's executive team stands up and claims that the new "energy creation" schemes will generate xxxxxx jobs"

I notice that Scira Offshore are re-advertising a position of Trainee Mechanical Engineer for their recently constructed Sheringham Shoal windfarm. This appears to be exactly the same advert as was carried late last year, along with a qualified engineer position. There doesn't appear to be much enthusiasm for "Green Jobs" in Norfolk...

As an aside here are a couple of interesting quotes from their website: (my bolding)

"What is the projected life of the wind farm and what would the reasons be for the wind farm to be dismantled?

The lease period for the wind farm is 50 years. As part of the consent, it is agreed that the project owner will remove the wind turbines and all associated equipment above the ground at the end of the wind farm’s lifespan. Continuing developments in offshore wind technology are expected to extend the operational life of wind turbines at sea, so that they may be maintained beyond this lifespan. However, this will be up to UK authorities to decide."

"Why do two Norwegian companies want to invest in the UK wind industry?

Both owners - Statkraft and Statoil - have specific reasons for investing in the UK however together, they see the UK as a key market due to the Governmental support regime, the nation’s significant wind resources – the UK has 40% of Europe’s wind resource - and the country’s future energy requirements."

More here:

Jan 24, 2013 at 11:43 AM | Unregistered Commenterdave ward

dave ward - I wonder how the real lifespan of an offshore wind turbine, based on Danish experience as actually being 7-12 years, fits in with the 50-year site lease..?
The other thing is - wind turbines depend on constant wind speeds. The Uk's 'wind resource' tends to be gusty and highly variable both in direction and duration. We may have 40% of Europe's wind resource, but to misquote that famous British Rail excuse, it is, actually, the 'wrong sort of wind'.
P.S. Current contribution of wind to UK electricity demand: 1.3%....

Jan 24, 2013 at 2:42 PM | Unregistered CommenterDavid

Hang on a minute - that 'Energy Company Obligation'. How is that supposed to work..?
' obligation on certain energy suppliers to improve the energy efficiency of domestic households.'
Knock at the door.
'Good morning. We're from Eon/Scottish Power/Npower/Etc - we are legally obliged to improve your energy efficiency.'
How are you going to do that..?
'Simple. We'll install roof insulation..'
'Got it.'
'Wall insulation..'
'Got it.'
'Double glazing..'
'Got it.'
'Low energy lightbulbs..'
'Got them.'
'Condensing boiler,,?'
'Got one.'
'Do you turn your thermostat down one degree..?'
'Constantly - when my wife's not looking..'
(sigh) 'Well, there must be SOMETHING we can do - we're LEGALLY OBLIGED to improve your energy efficiency..!'
'Sorry, old chap - can't help you. Good day..'

Jan 24, 2013 at 3:56 PM | Unregistered CommenterDavid

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