The great green bait and switch

One of the great problems facing the policy – proposed by both Labour and Conservative –to decarbonise domestic heat by replacing gas boilers with heat pumps is that it’s fundamentally uneconomic. As I pointed out in a recent paper for GWPF, while air-source heat pumps are, on average, three times as efficient as gas boilers, electricity is four times the price of gas, so unless your installation is much more efficient than the norm, you will not see operating cost reductions from a heat pump, let alone pay back the extra capital cost.

One of the wheezes dreamt up to address this issue is to remove all the renewables subsidy costs from electricity bills. This has been suggested by the Climate Change Committee today, and the simultaneous picking up of the idea by the BBC and others suggests a fully fledged Green Blob campaign in support of the idea is under way.

Given that the subsidies are for…well…electricity generation, the policy would further divorce consumer bills from the underlying economic realities, and it would therefore be expected to cause harm to the public at large, but it’s interesting to consider just how much harm.

To that end, I’ve done some rough calculations, taking the £13 billion of renewables subsidies, and allocating them elsewhere so as to give a flavour of the price changes that might result.

One possibility is to move renewables subsidies to general taxation. However, this only reduces the electricity-gas price ratio to 3.3, which is still higher than the typical efficiency of a heat pump. This means most heat pump installations wouldn’t give an operational saving compared to a new gas boiler, and few would give savings sufficient to justify the extra capital cost.

Another alternative is to move the subsidies to gas bills. Here there are two key observations. Firstly, the policy would increase the cost of gas by around a third, from its current level of 5.4p per kilowatt hour to 7.3p. This would be pretty serious for householders, but it would potentially be terminal for businesses. It’s quite likely that many would go out of business, which would leave householders picking up the cost anyway.

Secondly, the policy would still not deliver on the Government’s decarbonisation plans, since the ratio of electricity to gas prices would only decline to 2.5. This figure would mean that more than half of air-source heat pumps would deliver operational savings, but very few would give a payback on the extra capital cost involved.

A third possibility would be to shifting the renewables subsidy costs onto retail consumers alone. If that were the case, businesses would be OK, but gas prices for householders would nearly double, to 10.9p. This is above the highest level of the price cap at the height of the price crisis, so it’s fair to say that it would be a hard political sell, Excess winter deaths would undoubtedly soar, and it’s hard to imagine that the public wouldn’t take to the streets. However, the electricity-gas price ratio would fall to 1.67, which would be enough to make a heat pump give both operational and overall savings for most installations.

But this is true only if the subsidies for heat pump installation continue at their current, grossly inflated level of £5000. Without this bounty, heat pumps would still not make economic sense for most people.

And this is where we get to the title of this article. The installation subsidies and the shifting of renewables levies onto gas bills (if it happens) can only ever be temporary. The installation subsidy is already only available to those replacing gas boilers, of course; next time round, you will pay full whack. Similarly, once everyone has a heat pump, the windfarms are still going to want their subsidies, and so the levies are going to have to go onto electricity bills.

This means, at some point in the future, the innocents who have, at Mr Miliband’s prompting, dutifully ripped out their gas boilers in favour of a heat pump, will suddenly find that their bills have soared. The cheap energy prices that lured them in will be gone. And when the time comes to replace the heat pump unit, it will cost many thousands of pounds more than it did the last time round.

The Government is engaged in a classic bait and switch – indeed possibly the greatest bait-and-switch of all time.

Don’t fall for it.