The application of policy costs onto the electricity bill is a significant disincentive to electrify and transition to newer low-carbon heating technologies, according to a new insight paper from Cornwall Insight - Who pays for supporting the net zero transition?
The costs of decarbonising the power system have mainly been funded through consumers’ electricity bills. In 2020-21 these costs amounted to £10 billion with the expectation that support for low carbon generation will continue to be necessary. To maintain a trajectory to net zero carbon emissions by 2050, we will need to decarbonise the nation’s heat. That will mean switching away from heating our homes with gas to an alternative low carbon source.
Policy decisions will need to be made around the scale, timing, cost and means of supporting this transition. The new report from Cornwall Insight considers the reduction in the retail price of electricity and outlines three options for policy cost reallocation:
A transition to or cost partitioning with the gas bill
A transition to general taxation
Recovery as a fixed “residual cost”
The paper notes a range of risks and opportunities with each approach and states that policy cost recovery is only part of a suite of tools that policymakers can use to hit carbon budgets.
“Given the scale of the challenge that net zero presents, the speed of decarbonisation required to reach the target, and the fundamental shift needed in both the technologies consumers use and how they use them, policymakers will likely need to consider all available tools at their disposal to support the net zero transition” said Dan Starman, Lead Consultant at Cornwall Insight. “There are very good reasons that policy costs were initially applied to electricity bills. However, the underlying economics of powering heat with electricity vs the counterfactual fuel of gas means the government should consider reform in the area. Current cost recovery mechanisms act as a significant disincentive to electrify and transition to newer low-carbon heating technologies. Driving the right financial incentives for consumers to choose low carbon options while managing the impact on the public purse will be key, and this is doubly important in a post-COVID-19 world”.
Mr Starman added that inaction would result in a lost opportunity for the government to pull another policy lever to support the net zero transition.
“Hence, we believe policymakers should utilise an assessment-based framework to disentangle policy costs and the electricity bill” Mr Starman said. “There are a range of wider benefits that can be achieved through reform in the area, including simplifying the retail landscape, alignment with the regulatory desire to reform the Supplier Hub and reducing the impact of supplier failures. We believe removing these costs from the electricity bill will support the government in meeting its targets, resulting in stronger electricity pricing signals, and supporting consumers in making more appropriate choices for the net zero transition”.