Price Rises and a World Beyond Levies

Another day, another price rise…well two of them, to be exact. And as I indicated in a recent post, they both follow SSE in placing an identified proportion of the ‘reason’ for the price rise on green levies.  Phil Bentley, of British Gas put up a good defence of what the levies achieve when he spoke on the rises on the Today programme, but he nevertheless followed SSE in suggesting that some 30% of the increase was due to levies.  Now that percentage, as we know, probably relates more to British Gas and others struggling to carry out their obligations in time for the demise of CERT and CESP than reflects a long term notion of the proportion that levies make up of long term price changes (the accurate figure, is about £22 on bills in the last two years against gas supply prices of £200, by the way). Nevertheless, both announcements confirm what I said about levies at the time of the SSE announcement: they are centre stage in announcements, and won’t go away.

So it’s clearly time to start thinking about what goes next. Are we going to stick with levies as the prime means to facilitate energy efficiency and the roll out of low carbon energy supply in the long term.?  Apparently we are, since there are a whole stack of new levies, overt or hidden in the fabric of the upcoming Energy Bill.  We’ll be levied for the new Contracts for Difference, and at least indirectly for Capacity Payments. One way or another, these costs will land in the consumers lap, and of course, as far as CfDs are concerned, there will be the new element of levy needed to include the results of negotiations on the new nuclear ‘strike price’. It remains to be seen how that can easily be explained as ‘not a subsidy’ when the product appears on consumer bills, and maybe that’s a debate for another day, but you might at least cast your eyes over a very interesting piece by Simon Bullock on the real cost of strike price negotiations.

Whatever the overall price of new nuclear included in levies for the future (Ian Marchant of SSE suggests perhaps £77 per year on everyone bill if we go for EDF‘s latest top-end strike price projection), there it will sit, on our bills at a much higher rate than today, and the arguments will, inevitably, intensify. And of course, it will be accompanied by the ludicrously self-defeating mechanism of the ‘levy cap’ , introduced by Treasury to place a ceiling on what levies can raise for low carbon development, and strongly signposted as a mechanism to damp down CfDs etc. in due course. It is not that one should not seek to control bills as much as the method by which this is done: first you announce a bill for consumers, and then, by another device, you seek to dampen the effect of the bill, making the purpose of the original bill  far less certain and  foreseeable in the process. A bit like announcing a budget for resurfacing the road outside your house, and then saying that resurfacing can only go on as far as a new cap on expenditure introduced after the road rollers have got to work, so that a quarter of the road remains dug up: but no matter, the new cap wasn’t breached.

Levies also have a regressive effect in that they are placed against bills as a flat amount, regardless of energy used.  They don’t spread the load of what we should be agreeing to bear in policy terms for low carbon energy development. So we have to get out of what is increasingly becoming a difficult policy cul-de-sac.

I have suggested on a number of occasions that all these arguments point clearly towards placing that load squarely on taxation – but equally clearly, not on ‘hypothecated’ general taxation , since we would by doing that, be carving a lump out of what it is that Treasury already spends its money on. What we need (and here I have to hat-tip the Energy Bill Revolution people (here) for all their work on new green and carbon taxes) is an allocation of new  green taxes (such as carbon floor price and EU ETS auctioning) for green energy development. We would then have at last, an honest debate about the financing of green energy, and a fair way of sharing whatever the agreed level was. The principle behind doing this, I was interested and pleased to see, was adopted  by the Shadow Chancellor at the recent Labour Party Conference, when he proposed using the proceeds of 4G telecoms auctioning to fund a programme of affordable house building.

What I have  been trying to get down on paper, in addition to how this principle might work for energy efficiency and renewable power obligations, is a method of  discounting some of those incoming  new taxes from counting against public expenditure limits. The original ‘tax foregone’ element of the Landfill Levy on burying recyclable waste looks like it is worth examining in this respect: introduced, I believe, by none other than John Gummer, now Lord Deben and chair of the Climate Change Committee.  I set out some thoughts in a paper here.  You might like to take a look at it. Whatever way we go, we certainly can’t continue down the present route, of that I am sure.

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