Green levies aren't falling

Among members of the Green Blob, it’s widely held that environmental levies are falling. Here’s a recent example of such a claim, from our friends at the Energy and Climate Change Information Unit. However, a glance at the data shows that they are not exactly correct.

Figure 1 shows the OBR’s data on such levies (forecast figures in lighter shade of blue), showing that the total cost fell slightly in 2021/22, but that it’s expected to fall through the floor in the current financial year, before returning to its previous levels by 2025/26.

Figure 1

Drilling into the detail (Figure 2), all these changes are driven by the Contracts for Difference Scheme, which saw many generators paying money back into the scheme as wholesale prices soared in the wake of the Ukraine War. So while subsidies under the scheme were £2.2bn in 2020/21, they fell to just £0.3bn in 2021/22, and are predicted to fall off a cliff this year, with the OBR reckoning generators will be paying back £3.8bn.

Figure 2

If this is right, then a claim that “green levies are falling” might just about be tenable. However, 2022/23 is almost behind us and it’s possible to see how things are panning out in reality. It’s fair to say that it’s not quite how the OBR imagined: with only 6 weeks to go, the total paid back has reached just £0.1bn and, with the scheme now having reversed direction – paying out subsidies rather than collecting repayments – it will be close to zero by the year end.

So the OBR’s forecast is going to be out by nearly £4bn. That means that in 2022/23, consumers are footing a bill of £10bn for green levies, just as they did in each of the previous four years. That’s around £350 per household. So much for green levies being on the wane.

What happens next?

The OBR is predicting that the CfD scheme will continue to repay consumers(or, given what we now know, that it will start to repay them), although less so over each of the next three years. But after that it says repayments will start to grow again. It’s interesting to wonder why this should be.

If the OBR is predicting that renewables generators will have lower costs by then, it’s hard to imagine that they will join the scheme at all. As the gap between market prices and their (alleged) costs increases, the incentive to sign up diminishes. It seems more likely then that the OBR is predicting higher wholesale market prices, driven by increasing renewables penetration onto the markets and/or further strangulation of fossil fuels. In other words, they are predicting that Government policy is going to drive the country into another energy crisis, but this time one that is entirely of their own making.