THE Chancellor’s Autumn Statement two weeks ago contained three items relevant to Net Zero and energy policies. The OBR have now published the data, so I am able to analyse them.
1) Electricity Generation Levy
This is intended to act as a windfall tax on non-gas generators which are benefiting from sky-high electricity prices, while many continue to receive obscene subsidies. As regular readers will know, I have been highlighting this costly and unacceptable anomaly for several months.
The new levy applies to nuclear, renewable and biomass generators, except for any covered by Contracts for Difference which receive a guaranteed price rather than the market price. The levy is calculated at 45 per cent of ‘Exceptional Generation Receipts’, the difference between actual revenue and revenue based on a benchmark price of £75/MWh.
The draft proposals appear to close the loophole whereby a generator sells its electricity at low prices to its parent company or others within its group, who therefore would end up making the windfall. I have previously written about how Oersted UK sells its power to its Danish parent company in this way.
This levy is a vital first step in fixing the broken energy market. However in my view it does not go far enough:
• The benchmark price of £75/MWh is far too high. Historically market prices have been running at around £50/MWh.
• The levy charges only 45 per cent of the windfall ‘Exceptional Generation Receipts’. I am not aware of any reason why it should not be charged at 100 per cent. We need to remember that whereas the oil and gas sector is high risk with high prices often offsetting bad years, the renewable sector is heavily subsidised and consequently largely protected from market fluctuations.
• The expected revenue from the levy is £2.8billion a year. However the cost of ROC subsidies alone is projected to run at £7.6billion a year over the same period. As a minimum, the levy should aim to cover this cost.
• A rough calculation shows that a resetting of the benchmark price would increase revenue by £1billion a year. On top of that, a doubling of the Levy to 90 per cent would bring total revenue to £7.6billion a year.
2) Electric car taxation
The Chancellor announced that electric cars would no longer be exempt from Vehicle Excise Duty from April 2025. Although welcome, this does not go far enough.
If half of all new car sales really are electric in by 2025, just over two years’ time, as the government has assumed (something I find absurd), the loss of fuel duty will be crippling for the Treasury. On average drivers pay about £1,000 a year in fuel duty, including the associated VAT. If the Office for Budget Responsibility are right, one million EVs will be sold in 2025, which alone will reduce annual tax revenue by £1billion. With those EVs already on the road and to be sold in the next two years, the government could be staring at lost revenue of maybe £3billion by 2025, a figure which of course will remorselessly increase. This is not only unaffordable, it is grossly unfair to other taxpayers.
3) Fuel duties
Which brings us to the question of exactly who will pay for this subsidy to EV owners!
It has been widely reported that fuel duty will be increased by 23 per cent next year. Forbes for instance said: ‘According to the UK’s budget watchdog, British motorists will be paying more for their (fossil) fuels next year. A 23% increase in fuel duty will be imposed from March, predicts a paragraph in the Office of Budget Responsibility’s (OBR) backgrounder to today’s Autumn Statement by Chancellor Jeremy Hunt.
‘The increase would net the U.K. government $6 billion, says the OBR. Chancellor Hunt did not mention the measure in his statement to parliament, 17 November. “This would be a record cash increase,” said the OBR’s Economic and Fiscal Outlook published earlier today. It would raise the price of petrol and diesel by around 12 pence a litre. Fuel duty has been frozen in the UK since January 2011.’
The Chancellor maintains that nothing has been agreed yet, and that fuel duty will be set in next March’s budget. But the table below clearly shows that the OBR have built this increase into their projections:
As the table shows, revenue from fuel duty is projected to rise by 21 per cent next year: that’s £5.2billion.
Fuel duty was temporarily cut in the March 2022 Budget by 5p/litre, from 57.95p to 52.95p. This was intended to partially offset the rising price of petrol and diesel, but was effectively funded by higher VAT receipts on the aforesaid higher prices. In normal circumstances, therefore, that 5p cut should be reversed only as pump prices fall back.
A look at the table shows the real reason why the OBR are projecting an increase of 23 per cent, which would take fuel duty up to 65p/litre. Even with this increase, revenue would still only be £27.9billion in 2027/28. Fuel duty typically used to pull in about £28billion a year, so the planned increase in duty is needed to plug the gap caused by larger numbers of EVs on the road.
In the absence of a road pricing scheme any time soon, it would appear that other car drivers will have to pay more at the pump to subsidise EV owners.
National Grid issues capacity warning
On Tuesday last week, November 22, the National Grid issued a surprise warning on its capacity for that evening when British households were expected to increase energy consumption during the cold snap. A ‘tight electricity margin’ notice was sent out warning of a potential shortage from 7pm.
The electricity network operator issues such warnings when ‘there may be less generation available’ than operators expect will be needed ‘to meet national electricity demand’.
It came with temperatures dropping combined with a reduction in the amount of wind power typically generated. The pinch point for the grid came as wind power generation fell to 3,958 megawatts at noon on Tuesday, less than half of the 10,000 megawatts produced a day earlier.
The warning was quickly withdrawn as contingency measures were put in place. However such warnings were virtually unheard of a few years ago, when we had plenty of dispatchable capacity which can be turned on and off, and were not over-reliant on intermittent wind power.
Last Tuesday was not particularly cold, and demand peaked in early evening at 41 GW. In the middle of winter it can peak at around 50 GW. Moreover wind power was not particularly low at 3 GW. Last winter it dropped below 1 GW for several days.
As Phil Hewitt, director at Enappsys, said: ‘This is the first tight day of the winter but it is not super tight. It is a small appetizer of tightness, there will be much tighter days ahead.’
When demand on November 22 peaked at 8pm, we were relying on gas and coal for more than half of our electricity. In addition all the interconnectors to Europe were working at full capacity providing 16 per cent. Heaven knows what would happen if they had no surplus to export.
Gas power (CCGT) was running at 21 GW. In theory we have 28 GW of gas power capacity, excluding mothballed plants. But you cannot run these 24/7, and in practice 25 GW is the most we would typically expect to get.
It is therefore abundantly clear that if we get a cold, windless spell of weather this winter, the grid is going to be stretched to breaking point. And that will only be a matter of time.
Building more wind farms will be of little use when there is no wind. And nobody wants to invest in new CCGT plants, as they are undercut by heavily subsidised renewables and hammered with carbon taxes to boot. The system guarantees priority access to the market for renewables, and as a result CCGT plants are idling two thirds of the time, destroying their economic viability.
It is time to put the grown-ups back in charge of our energy policy.