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Switching Renewable Subsidies To Gas Will Make Little Difference

By Paul Homewood | Not A Lot Of People Know That | October 14, 2021

It is not only the UK that is thinking of switching green levies from electricity to gas.

But this analysis inadvertently highlights why the whole idea is so ludicrous:

In the UK, consumer prices for electricity are five times more expensive than for gas. It is a disincentive to adopt electric heat pumps. To make things harder, 23% of the electricity price comes from climate and social levies. It’s just 2% for gas. No wonder the UK continues to install about 1.7 million gas boilers a year. Jan Rosenow and Richard Lowes at RAP call for changes that will incentivise customers to buy heat pumps while having a minimal effect on their total bill or the revenues raised, according to their calculations. One way is to simply move the levies from electricity to gas. The Netherlands and Germany are planning to do just that. Sweden has done it for decades. But such changes require serious policy reform and may face political barriers. Much simpler would be to minimise taxes on the electricity consumed by a heat pump, as Denmark started doing this January. Despite heat pump sales rising, without a drastic change it’s difficult to see how the UK will reach its target of 600,000 new heat pumps per year – it’s only in the tens of thousands now.

Every year households in the UK install about 1.7 million gas boilers. In May, the Heating and Hotwater Industry Council reported that 2021 looks to be a record year for gas boiler sales, with year-to-date sales up 41 per cent from 2020. So far, low-carbon heating occupies a small — although growing — niche in the heating market.

One important factor supporting a booming boiler market is quite simple: Gas is cheap and electricity is expensive. Residential electricity prices per kilowatt hour are currently around five times higher than gas prices. This means that switching to a heat pump, even with an efficiency of 300 per cent, does not offer bill savings for customers on a standard tariff.

This is partly a political choice. Legacy policy costs drive part of the difference in price. Most of levy-funded energy and climate policies, which make up 23% of the total household bill, are presently paid for through electricity bills. In the UK, these legacy costs include charges for policies such as feed-in tariffs, the Energy Company Obligation, Contracts for Difference, the Renewables Obligation and the Warm Home Discount.

https://energypost.eu/redesigning-uk-electricity-taxes-to-boost-heat-pump-sales/

For a start, let’s get away from the misleading use of the term, levies and taxes, which are intended to distract attention from the truth.

Apart from the tiny Warm Homes Discount, all of these added costs are SUBSIDIES for renewable electricity. It is therefore perfectly logical that they should be included in the cost of electricity, so that the price reflects the cost of generation.

There is no logic in adding the cost of subsidies to the price of gas any more than adding them to the price of food or petrol.

In any event, the switch will make little difference to the relative cost of heat pumps. Subsidies currently cost domestic customers about 2.5p/KWh, a total of £2.6bn a year. This brings the electricity price up from 12.5p to 15.0p/KWh. (These figures are probably out of date now, but the comparison remains the same)

Annual domestic gas consumption is 300 TWh, so £2.6bn would equate to 0.9p/KWh, increasing gas prices from 2.5p to 3.4p/KWh.

In other words, electricity will still cost nearly four times as much as gas. With heat pumps working at 300% efficiency, that still means they will be more expensive to run.

In any event, the reason why barely anybody wants heat pumps has nothing to do with the running cost, as people have no idea what they cost to run. It is the fact that they will have to fork out £10,000 plus to install one, not to mention the cost and hassle of insulation and replacing radiators.

There is, however, one fatal flaw in the argument employed by the authors of this study. They claim that switching the subsidies to gas is a zero cost option. It may be in the short run, but eventually, when nobody uses gas anymore, the subsidies will have to revert to being added onto electricity bills.

Under that scenario, homeowners will have paid out £20000 for heat pumps, but will still have to pay the cost of subsidies on their electricity bills. In other words, a double whammy.

October 16, 2021 - Posted by aletho | Economics, Malthusian Ideology, Phony Scarcity | Human rights, UK