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Environmental levies added to electricity bills in the UK are set to climb 23 per cent by the end of the decade, according to official forecasts, highlighting the upfront costs of the shift to renewable energy and reigniting debate over how it should be paid for.
These core levies are set to rise from £12bn in the year 2024-25 to £14.8bn in the year 2029-30, according to figures published by the Office for Budget Responsibility this week alongside the Budget.
The increase is driven by escalating costs in the so-called capacity market in which power stations, often gas-fired, are paid to be on standby to step in when needed.
This back-up market is becoming more important given the shift towards intermittent renewable electricity, with the OBR forecasting it will cost £4.1bn in 2029-30, up from £1.3bn in 2024-25.
The expected increase in costs levied on electricity bills comes as the government is trying to encourage people to replace gas boilers and petrol cars with electric heat pumps and electric vehicles.
Campaigners have long urged the government to move the levies off electricity bills and on to gas bills, or fund them through general taxation.
However, both options are challenging due to the risk of pushing up heating costs for those using gas-fired boilers — currently the vast majority of households — or weighing down the Treasury’s balance sheet.
Adam Berman, director of policy and advocacy at trade group Energy UK, said the current system of funding older renewables subsidy schemes via bills was “regressive”.
However, he argued it was “fair” to put the costs of current core renewables schemes on to electricity bills given their role in “meeting the country’s future ambitions for clean, cheaper, domestic power”.
“Such funding will deliver benefits to customers and businesses through cheaper renewables bringing more stable pricing and strengthening the country’s energy security,” he added.
Greg Jackson, founder of Octopus Energy, said: “The OBR’s predictions for the growing costs of levies on electricity are shocking. To modernise and grow our economy we need people to switch to electric heating and cars, but ever-rising levies on electricity will make this harder for everyone. The government can help by shifting costs on to dirty fuels and introducing regional pricing, so that renewables cut bills instead of increasing them.”
The OBR forecast includes a 35 per cent increase in the forecast costs of the government’s scheme to guarantee renewables developers’ electricity prices, known as contracts-for-difference. It expects this to rise from £2.3bn in 2024-25 to £3.1bn 2029-30.
The actual cost of the scheme will depend on wholesale prices at the time. Developers have to pay back to the scheme if wholesale prices climb above the level guaranteed by the government.
Labour increased the budget for the most recent auction of new contracts under the scheme as part of its efforts to reach its target of decarbonising the power system by 2030.
The OBR’s forecasts do not include levies to pay for the ECO energy efficiency scheme nor so-called feed-in tariffs to support green energy.
The total £14.8bn figure in 2029-30 compares with £10.9bn in 2023-24, marking a 35 per cent increase over the period.
The figure includes £600mn each year to pay for electricity bill discounts for vulnerable households, as well as £100mn-£200mn annually from next year to fund greener gases.
The Department for Energy Security and Net Zero said: “In a world of volatile fossil fuel markets, we are confident a clean power system is the cheapest to build and operate. The effect on bills by 2030 depends on the pathway we take to achieve our policies, which we will set out in due course.”