The costs and benefits of EU energy and climate policy

Michael Grubb, Professor of International Energy and Climate Change Policy at UCL, examines claims that EU energy regulation increases the costs of UK energy bills and argues that many benefits are often overlooked.

With a speech today by Amber Rudd, the Secretary of State for Energy and Climate Change, energy issues have exploded into the Brexit debate. Not before time. An article by Conservative MP Dominic Raab which accompanied his announcement of support for leaving the EU (Sunday Times, 21 Feb) stated that ‘skewed EU energy regulation will add £149 to bills by 2020.’  In an angry reaction to Rudd’s speech today, Matthew Elliot, the Vote Leave campaign chief executive, reiterated claims that EU regulation adds £billions to overall UK energy bills.

Irrespective of exact numbers, there appears to be a widespread belief by many who favour Brexit that the EU’s energy and climate policies impose significant, unjustified costs on the UK and that we could avoid these by leaving.

This note examines the specific number, and the broader assumption.

Upon enquiring about the source of the £149 remark, Dominic Raab’s office indicated a report by Open Europe (Christopher Howarth and Raoul Ruparel, 2014). This argued that “energy-related regulations linked to the EU impose a recurring cost of around £8.4bn per year on Britain, compared to £1.3bn a year for UK derived regulations”. It disputed Government estimates that the benefits far exceed these costs, and projected that “by 2020, EU-related regulations or targets will increase annual household bills by £149 (11%).” Matthew Elliot’s remarks appear to draw on a report he authored for Business for Britain, Energy Policy and the EU.  Its estimates adopted a similar approach to the Open Europe report.

The claims made about the energy costs of EU regulation are almost entirely false for at least three structural reasons:

• They ignore the benefits at several levels. These include benefits which come in the form of reduced energy bills (for measures improving energy efficiency) or other consumer benefits (like income from solar PV feed-in-tariffs or the savings expected from smart meters). The assessment also failed to make any allowance for the impact of energy efficiency and renewables in reducing demand for fossil fuels and hence contributing to lower fossil fuel prices and import dependence.
• In the Open Europe report, the costs of both pre-existing renewable supports (the Renewables Obligation system introduced in 2000) and the UK’s Energy Market Reform are assigned to the EU as ‘UK policies implementing EU goals’ – as are the entire costs of the UK smart meters rollout. This is not only incorrect, it also appears to assume that without the EU framework, the UK would have no target or supports for renewable energy (including those already in existence), and would have none of the other policies assigned to EU, namely for smart meters, better billing, or efficient products.

• Such a scenario would be clearly inconsistent with several dimensions of modernising the UK energy system, including action on climate change. In particular, it would be inconsistent with the UK Climate Change Act and its commitments to emission reductions (independent to the EU), which are currently legislated out to 2027 (as well as the Act’s binding commitment to 80% emission reductions by 2050).

Somewhat embarrassingly for the authors of the Open Europe and Business for Britain reports, they also both dismissed the estimated benefits of EU climate policies which assumed that EU action would help a global deal. The belief that this was “clearly a flawed assumption” (Elliot and Lewis (2014)) looks rather hollow after the success of the Paris COP21 conference, within which the EU – led in several areas by Amber Rudd – was a pivotal player.

The UK 2020 target for renewables appears to be a particular focus of criticism. It can be debated whether this was “skewed” – it takes the UK from almost bottom of the European league to being in the lower third, in terms of percentage renewable energy contributions. But it was certainly not foisted on the UK by European bureaucrats – it was the target that was offered and agreed by Tony Blair. Buried in their 2014 report, Elliot and Lewis acknowledged that “there is a good chance that the UK would have introduced similar policies had it been outside of the EU.”

Moreover it is likely that the cost of the renewables target, which a major focus of the £149 figure in the report, will be substantially lower than projected, at least for electricity (even if a detailed reappraisal is beyond the scope of this note). The cost of the two major UK renewable electricity sources (wind and solar) have both fallen substantially even in the period since the Open Europe and Business for Britain reports were published. This has translated into the costs per unit of the main policy mechanisms (solar feed-in tariffs and the auctions for renewables contracts-for-differences, and for capacity) being lower than projected. These large cost reductions can be principally attributed to the EU’s overall effort on renewable energy in combination with smart UK implementation. UK energy demand has also fallen, so that the UK needs to generate less renewable energy to meet its 2020 renewables target (which is expressed as a percentage of demand).

That being said, it remains important to acknowledge that the debate on energy and a potential Brexit is suffering from exaggerated claims on both sides. As such, the Times titled an article in its business section on 29 Feb 2016 ‘Brexit could leave UK with blackouts and gas shortages’. This is similarly overstated; the real issues are much more complex. It is not obvious that much would change in the short run; the real issues are strategic. But to the extent that some seem to see Brexit as a cover for undoing the UK’s environmental policies, they should at least be honest about it – and then consider the implications of that for the Single Energy Market.

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Michael Grubb is Professor of International Energy and Climate Change Policy at UCL, Institute of Sustainable Resources. He is currently writing a Policy Note on energy dimensions of Brexit to be published by UCL European Institute in April. This blog is part of the UCL European Institute blog series on the EU referendum.