Compulsory contributions from UK energy companies

UK Government announcement (8 pages, PDF) of a plan to “propose legislation requiring energy suppliers and electricity generators to contribute an estimated additional £910 million” towards a “Home Energy Saving Programme”. This cost estimate relates to the period to March 2011.

According to the Government, these compulsory contributions from energy companies would not amount to a windfall tax.

Energy retailers would be required to fund more home insulation measures under the Carbon Emissions Reduction Target (CERT) programme (formerly known as the energy efficiency commitment), at an estimated additional cost of £560 million. The other £350 million are to be spent on a new “Community Energy Savings Programme” which would be “funded through a new and additional obligation on the energy suppliers and electricity generators”.

Under sections 7 and 8 of The Electricity and Gas (Carbon Emissions Reduction) Order 2008, the basis for allocating the burden of the £560 million between retailers seems to be the average number of customers supplied at 31 December 2007, 31 December 2008 and 31 December 2009 (except for new entrants where different rules apply). The basis for allocating the burden of the £350 million is not disclosed.

There are also some plans for future consultations or reviews on surcharges for non-direct-debit payments or pre-payment metering.

The possibility of charging electricity generators for more of the carbon emission permits issues within the current phase (2008-2012) of the EU emissions trading scheme was rejected on the grounds that it was not explicitly permitted in the relevant EU directive.

Comment. Assuming effective competition in retail supply, at least some of the £910 million is likely to be passed through to customers through bills, since the extent of each supplier's overall obligation under CERT will depend on its future market share. In other words, the additional compulsory contributions announced today make it more costly for retails to retain energy customers, and this additional marginal cost on retailers will presumably be reflected in their prices. Given the reliance on customer numbers rather than amounts of energy supplied as the basis for allocating the obligation, the burden of the scheme may be as great on low-consumption households as on high-consumption households. For the Community Energy Savings Programme, the charging base for the new obligation or tax is not disclosed, making it impossible to judge how much of the cost is likely to be passed through to consumers. Franck

For further information or advice please contact Franck Latrémolière.

Filed under Electricity, Gas.

Reckon LLP is an economics consultancy with expertise in data analysis, economic regulation and competition law.

About Reckon