The political football that is the cost of energy, just got booted up field as the coalition Government quickly turns defence into attack. George Osborne used his Autumn Statement to confirm one of the worst kept secrets in recent history.
Plans announced to address rising energy bills included a proposal to shift the cost of the Warm Homes Discount (WHD) scheme to general taxation, saving around £11 off energy bills, and a watering down of the Energy Company Obligation (ECO). The ECO scheme ensures that major energy suppliers have to help insulate homes, and the changes could reduce average bills by a further £35, if all the savings are passed to consumers.
The WHD is part of the Levy Control Framework (LCF). The LCF was established by DECC and the Treasury in 2011 and is designed to offer Parliament a degree of control and accountability over certain aspects of the levies which energy suppliers charge to consumers. These levies allow the suppliers to recover the costs they incur complying with the government's mandated environmental and social energy schemes.
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These levies are not subject to the controls routinely applied to the government departmental spending funded by general taxation, but the LCF offers a means of keeping the levies to a budget. The LCF cap is set at £3.9bn for 2014/15 and set to rise to £7.6bn (2012 prices) for 2020/21 (equivalent to around £290 per household).
The LCF is therefore one of the key measures by which government seeks to balance one of its overriding policy objectives - affordable energy for consumers - against the other two, security of supply and achievement of decarbonisation targets.
The LCF currently covers three government schemes - the Renewables Obligation (RO), the Feed in Tariffs schemes (FITs) and the WHD. The RO and FITs are the principal subsidies for renewable energy schemes, whereas the WHD is essentially a contribution to energy costs, worth about £135, targeted at low income and vulnerable households.
The scope of the LCF will expand in due course to include the new FIT CFDs which are being introduced to replace the RO for new low carbon generation projects as part of the government flagship initiative, the Electricity Market Review (EMR), and the 2020/21 cap will allow for one new nuclear plant.
There are other costs incurred by energy suppliers and passed on to consumers in energy bills, which are not covered by the LCF, like network costs.
DECC says the total cost of all its policies is currently around £112 on a typical bill, rising to around £190 in 2020; to provide some context, only £90 of this 2020 total is covered by the LCF.
However a recent from the National Audit Office (NAO) expresses concern around the effectiveness of the LCF.
The report claims the levy control board, the joint Treasury and DECC body tasked with oversight of the LCF, has focused too much on cost control and not enough on the associated impacts on energy policy outcomes. In other words, the Government is failing to properly assess whether the huge green energy levies are actually achieving policy objectives.
The report also criticizes the Treasury and DECC for not being sufficiently clear which schemes should be covered by the LCF; crucial given the LCF is confined only to schemes classified as 'levies'.
An illustration is the uncertainty surrounding the cost control arrangements for ECO, not covered presently by the LCF, and in future for the capacity mechanism which is being introduced alongside the new FIT CFDs.
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The cynical might predict that the Treasury, with its penchant for gas, will seek to keep the capacity mechanism payments out of the LCF. Regardless, insofar as any consumer-funded scheme is not covered by the LCF, the report recommends that DECC should explain how the costs of the schemes will otherwise be controlled and assessed.
The report also expresses concern that DECC may struggle to control levy costs as a result of the LCF's expansion to include FIT CFDs. This new scheme will pay eligible low carbon generators a top-up payment if market prices fall below a strike price, which means that the levy cost will rise when the prevailing market price drops, making accurate forecasting of energy market prices critical to the control of levy costs. Given the volatility of fuel prices, this is not going to be an easy task.
The LCF is important for consumers, ensuring the levy costs are controlled, whilst providing general accountability to Parliament. But it is also vital for investors, who crave certainty. There is plenty of talk of investment decisions being delayed, or abandoned, because of government prevarication, obfuscation and U-turns around the level of renewable subsidies - with the government's track record on FITs for solar PV a particularly sorry one. The more clarity and less political risk, the better.
Renewable energy and energy efficiency targets might be at stake, but so are jobs in the emerging green economy. Installers up and down the country depend on energy suppliers spending on efficiency measures such as loft and cavity wall insulation.
All the speculation has been damaging, especially around the ECO scheme. There have been reports in the press of ECO projects getting suspended in anticipation of this week's proposals for watering down of the ECO scheme. Given that ECO is all about energy efficiency and reducing consumption resulting in lower energy bills for consumers, this is somewhat ironic.
Now we have the announcements, we can expect the energy cost football to receive another good kicking in the months ahead, but I suspect it will be a midfield battle, with little in the way of goalmouth action.