I was looking at my electricity bill the other day and I noticed how little of it was paying for actual energy. In fact only 41% of what SSE charged me went to
Buying the energy our customers use
It is mostly admin, distribution, profit and tax or quasi-tax (5% VAT and 12% government ‘schemes’). It made me wonder how much of the money I pay for electricity gets spent on fuel and how much on everything else. I chose the worst polluting fuel source from the point of view of climate change – coal. If all my electricity came from coal, how much of the 15.77p per kWh that SSE charges me is to pay for the coal needed? I give the calculation and my sources below*, it comes to a meagre 10% of the cost. That is not much more than the SSE profits of 6% and a lot less than the 17p going to government.
So when I buy electricity I am not buying the energy so much as the cost of converting the energy into electricity and delivering it to my home. Like when I buy a sculpture I am not really buying the marble but what people do with it.
Now having bought our electricity how expensive really is it? Let’s take a villain-of-the-piece for many green minded people – the tumble dryer. Imagine a single parent struggling with both time and money. Even if they efficiently hang out their washing and retrieve it without having to dodge showers, then it will still take, say, a quarter of an hour to process the equivalent of one load in a tumble dryer. And even if they are on a salary as low as the National Minimum Wage (£7.83 per hour from 1.4.18) their cost in terms of time is roughly £2. So that is a minimum for the cost of the clothes line. If they already have a tumble dryer, say it came with the flat they are renting, what is the cost of using it instead? This helpful website gives the cost and carbon footprint of such things. It comes to about 40p. So should they lose the £2’s worth of their stretched time or spend 40p? The low price of electricity massively incentivises them to use the tumble dryer.
In terms of the overall economy, we can consider the price of the actual energy here, i.e. the coal needed to dry the clothes. That comes to only 10% of the 40p, or 4p. So it is 4p against £2. That is why we rely on energy so much, it is so amazingly cheap. It is one reason why global CO2 emissions are relentlessly rising, as we find new ways and people to use energy we find that the cost of the fuel is often a minor factor. Imagine if we decided to increase the cost of the coal to the level required to make the washing line equivalent to the tumble dryer? We’d need to add £1.60 to the cost of the coal which is a 4000% increase from the 4p.
I found another example when I looked at my water bill. Thames Water charge me £2.08 to supply me with 1m3 of water and then clean it up again after I’ve used it. Surely that is a tiny cost compared against the cost of heating up the water to bath or shower temperature? I did a quick calculation and actually, No, the costs are only another £2, about the same.
So the cost of the energy seems to be a problem for addressing climate change. Is it also an opportunity? It certainly is in this respect, the change from fossil fuels to other energy sources may cause some energy price increases, which is a reason why politicians are worried about implementing the severe changes required. But a significant increase in energy price leads to only a small increase in the price of goods and services. Even if the 4p coal cost imbedded in the tumble dryer example was doubled to 8p, it would still be small compared against the 40p electricity cost and extremely small compared against the £2 in labour.
Let’s see how this impacts on coal because it is such a large contributor to CO2 emissions. The problem is that nearly all the energy in coal is released by combining carbon atoms with oxygen atoms to make CO2, while for gas there are up to 4 hydrogen atoms with each carbon atom, and these release energy making benign H2O. So anything to de-incentivise coal will be a quick hit on global CO2 emissions. As recently as 2013 about 85% of the CO2 emissions associated with electricity generation in the UK was due to burning coal. But coal was only 40% of sector. A doubling of the cost of coal has a large impact on driving out this harmful fuel and yet that would not strongly affect even the struggling parent using his tumble dryer, and that is the opportunity.
The Citizens’ Climate Lobby’s policy of a rising fee and dividend is perfectly matched to this opportunity. In contrast to the taxes on my SSE bill, the fee is on carbon, not on electricity. The Fee is targeted at precisely the problem. Gas, with its lower carbon impact, will be taxed at less than a third of the rate and initially will take over from coal even at the low levels of the Fee in the early years. This will lead to enormous and early carbon reductions. Later, as the fee increases, gas will become uneconomic compared to carbon free energy and even gas will be driven out of electricity production. All the while the impact on my electricity bill will be relatively modest and energy overall will remain cheap. Meanwhile, the dividend may well more than compensate for slight increases. Studies have shown that the poorest 2/3 of us will be equally or better off under the new system.
Another opportunity is the current tax on my electricity, a total of 17% of my bill is passed to the government. If the tax was targeted at the carbon as CCL advocate, rather than the electricity, the impact would be huge.
Imagine there was a need to preserve marble, would you tax all sculpture whatever it is made from, or put a fee on marble?
As I close here is a surprising epilogue: in the UK what I have just been discussing has already happened. Coal use in the UK has plummeted since 2013 and now accounts for less than 10% of electricity and is still falling. And what is more, the major cause was a carbon tax: the “the carbon floor price” moved from £8 to £18 and made the economics of coal “terrible”. Surely grist for another blog in this series.
How I derived my fact – 10% of the electricity cost is the coal.
- 1 t coal makes 8141 kWh
- The ‘current average global efficiency rate of coal-fired power plants’ is 33%
- There are losses of about 11% between the power plant and my home, which means 89% efficiency in distribution
- So this 1 t of coal generates 8141 x 0.33 kWh of electricity and of that 8141 x 0.33 x 0.89 kWh = 2759kWh arrives at my home.
Coal price per tonne is about $60 US, or about £45
- This £45 gets 1t coal which gives me 2759 kWh of electricity so the pence per kWh is 100 x 45 / 2759 = 1.63p per kWh. So the coal cost in my bill is 1.63p per kWh.
- SSE charge me 15.77p per kWh, only 10.3% of the price is the coal.
- This may be a slight underestimate because coal could be a cheaper way of generating electricity than other methods and the SSE price reflects a combination of all the methods. However the Department for Business, Energy and Industrial Strategy (BEIS) publishes data which suggests coal is now more expensive than average
So my estimate of 10.3% of my electricity cost is if anything an overestimate.