Last year households and businesses paid more than £8 billion in green taxes that were added to energy bills. Campaigners have been calling for these levies, which bump up domestic energy costs by about £153 a year, to be scrapped.
But where does the money actually go once it is collected by the energy firms? What kind of green schemes is this cash paying for?
To start with you have to distinguish between what is actually a green tax, and what is a measure to help low-income households, because the two get lumped together.
Of the £153, about £93 is specifically green. The remaining £60 is used to fund the Warm Home Discount — money given directly to poorer households in winter — and the Energy Company Obligation, a scheme that helps pay for poorer households to insulate their homes.
The average £93 payment comes to a total of £8.3 billion which is collected from our bills, according to the energy analyst Cornwall Insight.
This is specifically for three taxes: the renewable obligation, feed-in tariffs and contracts-for-difference.
They were introduced respectively 20, 12 and five years ago with the aim of encouraging the industry to decarbonise, but they have become a “millstone around people’s necks” according to Robert Halfon, a Conservative politician. He wants them to be scrapped to ease the cost of living crisis, but this idea was ruled out by the prime minister, Boris Johnson, on Friday.
Following the money — where does it go?
Once the green taxes are collected by the energy companies via our direct debits and cheques, most of the money is handed directly to the regulator Ofgem or state-owned bodies that administer a specific scheme. It is then paid out to suppliers or electricity generating companies which claim subsidies for meeting their green energy targets.
Sometimes an energy company can be both a supplier and generator, for example British Gas, EDF and Scottish Power, or sometimes the generator will be a separate company, such as Orsted, Europe’s largest wind farm operator.
We asked the Treasury, Ofgem, and the department for Business, Energy & Industrial Strategy exactly how much of the money was spent. The government said it was unable to share information at this time because different levies work in different ways. We also asked the National Audit Office, the government’s spending watchdog, but it said it had not analysed how this money has been used.
Renewable obligation
The biggest green levy on your bill comes from what is known as the renewable obligation, which started in 2002. It adds about £75 to the typical annual bill. The overall cost last year was about £6.5 billion.
This government directive tells energy firms such as British Gas, EDF and Eon to generate or source an increasing amount of green energy from renewable sources. If they do they get a certificate. These certificates cost them money, but they can recoup that through energy bills.
These certificates are tradable commodities that can be purchased by other companies seeking to meet their obligations without having to generate or source green energy themselves.
Trading these certificates has become a way for firms to offer cheap green tariffs without ever having to generate any green power. Sometimes our green taxes fund certificates for power stations based overseas.
The renewable obligation ended in 2017 but companies that have already invested in renewable technology under the scheme are entitled to continue receiving payments for the duration of their contracts, and so the taxes still appear on our bills.
Feed-in tariffs
This scheme was launched in 2010 to encourage households to invest in solar energy generation. These payments add about £17.50 to the average energy bill and cost £1.5 billion in total last year.
The idea was that homeowners who invested in solar panels on their properties would be able to sell the energy they generated back to the grid. Solar panels are expensive, so they needed an incentive, which came in the form of a promise that they would always get a minimum rate for their power, known as a feed-in tariff. The rate was guaranteed to be inflation-beating for up to 25 years.
Some argue that the original scheme was too generous, because early adopters received multiple times what it costs to generate solar power today.
The payments shrank over the years for later adopters and the scheme ended for new customers in 2019.
Those who signed up in the early years are, however, still entitled to the payments they originally agreed to plus inflationary rises for the duration of their contacts.
Many are actually losing out, though — big time — because their energy has become increasingly valuable. For example customers of EDF are paid 1.5p per kWh sold to the grid, but EDF then sells it on for 28p per kWh.
Contracts for difference
This scheme replaced the renewable obligation five years ago. It guarantees suppliers a set price for the green electricity they generate. These prices can be set on 15-year contracts and are agreed on bundles of energy sold at auction, for example a certain amount of wind power.
If households pay below the guaranteed level, for example if wholesale prices fall sharply, the state-owned Low Carbon Contracts Company (LCCC), which acts as the intermediate body between generators and your supplier, pays the generator for the difference.
If the price of electricity is higher than the set price, the generators such as Orsted pay the suppliers via LCCC. At present, the market price for electricity is much higher than the cost of generating green power, so generators are paying money back to suppliers, again via the LCCC.
The scheme added only 29p to household bills last year because they soared way above the cost of generating the energy. As the market price for energy is now higher than the set price, suppliers are likely to get money back over the course of this year under the scheme.
Octopus estimates that up to £1 billion will be returned to the LCCC. This will then be given to suppliers.
But that does not mean it will automatically find its way back to households because it is up to individual suppliers to hand back this money to customers.
Ofgem said it is helping to create the right infrastructure for net zero to thrive. Net zero is when the amount of greenhouse gas produced and the amount removed from the atmosphere is the same, ie when there is no net negative effect.
It said the obligations that are often termed as environmental or green levies are all underpinned by legislation that places obligations on both the energy companies and the administrators of the scheme. It has programmes to ensure that beneficiaries and energy firms are regularly audited and “where non-compliance is found we look to take compliance or enforcement action”.
What’s the solution?
Many campaigners want the green levies to be scrapped. Halfon, the MP for Harlow, said: “It’s an absolute no-brainer that the government should either remove these levies completely, or introduce a downward escalator so that when international oil prices rise, the levies would be reduced accordingly. Removing these pressures from working people would be an important way of helping them with the cost of living.”
The government cannot walk away from contracts agreed over 15 to 25 years, however. Analysts say one other option is to shift the taxes from our bills to the general pot of taxation, while increasing other levies.
Joe Tetlow, the senior political adviser at Green Alliance, a think tank, said: “Green levies are key to bringing down consumer bills and getting the UK off Russian gas. Scrapping them is not an option but we can pay for them out of general taxation, which would win widespread support both among Conservative MPs and bill payers.”
Raising £8 billion a year would not be easy: it is equivalent to adding 1p to basic rate income tax and 2p to the higher rate.
What you can do
You cannot avoid paying the green levies but you can avoid some of the sneaky tactics used by suppliers to make you pay more.
Make sure you are paying the correct amount. If you pay by direct debit and have built up a large credit balance, ask your supplier to pay the money back and cut your monthly bills.
Suppliers can increase the amount taken from your account but the change must reflect higher prices or increased usage and you must be notified of the increase beforehand, usually at least ten days before the payment is taken.
Also, stick with your supplier’s default tariff, usually called the standard variable tariff (SVT). Although the amount a supplier can charge on this tariff has increased recently with the raising of the price cap this month, you may be offered the opportunity to fix it if you are willing to pay more. Fixed rate deals are not subject to the price cap.
SVTs can be hard to find because suppliers call them by different names. Eon calls its SVT the EnergyPlan, Ovo calls it Simpler Energy, Octopus has Flexible Octopus and So Energy has So Flex.
Suppliers have refused to say how much of their customers’ cash they are sitting on. There are concerns that this money is being used to prop up unprofitable businesses and there have been calls for this money to be ring-fenced. Households who pay a fixed amount each month by direct debit tend to build up a credit balance during the summer, when they use less energy, and reduce it over the winter, when they use more. There should be a zero balance over a year.
Only Octopus out of the big five suppliers disclosed that it had £85 million of customers’ cash, but said customers were still in overall deficit of £670 million. British Gas disclosed it had about £300 million of customer cash in February. Eon, EDF and Scottish Power declined to provide details. Ovo said that in February customers owed it more money than it owed them.
Ofgem said it would investigate reports that energy suppliers have been increasing direct debits “by more than is necessary,” as part of a review of the sector.