The EU wants its countries to improve its energy security and reduce household demand, so higher bills are inevitable
A gas pipeline in Siberia: EU countries are being urged to become less reliant on natural gas imports. (Photography: Alamy)
The EU has set ambitious goals for its electricity and gas supply sectors. These goals involve decarbonisation, an increased share of renewables, improved security of energy supplies and a reduction of demand. Do these goals all point to higher prices per unit of energy? The answer is, quite simply, yes.
Reducing the carbon emissions from the energy sector necessarily means raising the price of carbon dioxide released from gas and from power production. This can happen through a combination of reducing the cap on the quantity of emissions traded in the EU emissions trading scheme, via higher carbon taxes or by higher emissions performance standards. Higher carbon prices (actual or implicit) are essential to underpin low-carbon investments.
Current projections for the UK suggest the price will rise from its current level of about £10 per tonne of carbon dioxide to £70 per tonne by 2030. For electricity, this would raise wholesale electricity prices by about 40% based on the impact on the cost of gas-fired power generation. If gas for domestic heating were also to be subjected to a charge of £70 per tonne of carbon dioxide, this would raise wholesale gas prices by 70%.
Increasing the share of renewables in electricity and heat is likely to be expensive for some time to come. Onshore wind is currently about 50% more expensive per unit of energy than conventional power sources, while offshore wind is about 250% more expensive. If half of UK electricity were to come from an equal combination of onshore and offshore wind, this would raise the wholesale price of electricity by 50%. Heat from other renewable sources, such as solar thermal or biomass, is likely to have significant cost implications for the price of heat.
At EU level, the improvement of energy security is often taken to mean reduced reliance on natural gas imports (eg from Russia), and integrating the EU through increasing gas and electricity interconnection and increasing storage capacity of gas. The implication of such policies is a tendency towards more infrastructure, and a move away from cheaper (on average) gas to more expensive sources of energy. For instance, increasing domestic gas storage by 30 days of annual consumption essentially means that gas consumers must pay the interest cost on the value of the extra stored gas, as well as the capital and maintenance cost of the storage facility, and it might put another 1% on wholesale prices.
A reduction in household energy demand, relative to what would have happened anyway, is at the heart of the energy policy of every EU country. Simple economics suggests that lower demand must be supported by higher unit prices. And indeed looking across the world, the energy intensity of economies is strongly and inversely correlated with average energy prices. For example, Denmark has one of the most energy-efficient economies in the EU. It also has the highest domestic electricity prices, with taxes making up about 50% of the price.
So if the EU is serious about meeting its stated energy objectives, the unit price of household electricity and gas must rise over the longer term. This does not necessarily mean proportionally higher average energy bills, as households will naturally invest in energy efficiency improvements. However it will inevitably mean significantly higher energy bills (or reduced energy comfort levels) for those who are unable or unwilling to adjust to higher energy prices.
Author: Michael Pollitt
Source: The Guardian