Green tariffs – a price cap loophole?

Will the exemption of green tariffs from the energy price cap bill provide a “loophole to continue to charge customers too much”? David Blackman investigates.

It’s widely seen as the big success story of recent energy policy: the dramatic jump in the proportion of the UK’s electricity needs supplied from increasingly cheap renewable sources.

Yet recent weeks have seen a cross-party backlash growing in Parliament against the government’s moves to exclude green tariffs from the energy bill price cap legislation currently being fast-tracked through Parliament.

The BEIS (business, energy and industrial strategy) select committee recommended in February that the wording of the bill should be tightened to make it harder for so called “greenwash” tariffs to evade the cap.

Then during detailed scrutiny of the legislation a couple of weeks ago, energy minister Claire Perry responded to these concerns by promising that she would get her officials to conduct research into the green tariffs currently on the market.

So, is the government set to backtrack on its moves to protect green tariffs?

Amongst those pressing MPs to tighten the exemption are Greg Jackson, chief executive of challenger supplier Octopus Energy.

Branding the green tariff exemption as a potential “loophole to continue to charge customers too much”, he says: “You can imagine suppliers introducing default tariffs that are green solely to evade the cap, which would deliberately run against the spirit and letter of the legislation.”

“Using it (the exemption) as a way of trying to avoid a cap should not be allowed.”

While no fan of price caps per se, Richard Howard, head of research at Aurora Energy, doesn’t believe that green suppliers should be allowed to play by different rules.

He says: “If you are going to start making exemptions, it’s going to make it even worse.”

Additional costs

Ecotricity, the green energy pioneer run by shadow chancellor of the exchequer John McDonnell’s favourite businessman Dale Vince, says in its submission to the BEIS committee inquiry that the exemption recognises the ‘additional costs’ incurred by green electricity tariffs.

Co-op Energy told the committee that the wording of the bill could be tightened up to specify that the exemption should apply if the wholesale energy purchased is backed by Renewable Energy Guarantee Origin (REGO) certificates.

Good Energy suggested in its submission that the way REGO certificates can be traded means the legislation should be further tightened.  Companies should hold a contract, such as a power purchasing agreement, with a specific generation site relating to the certificates they present.

Howard distinguishes though between the tariffs on offer from specialist providers like Good Energy and Ecotricity and those available from bigger players.

“You have providers like Good Energy who only do green energy and have their own fleet of renewable generation. Their customers only want green energy.

“If there is no exemption, their entire business has to fall within that cap, whereas for a larger supplier with diverse tariffs and customers, there is probably more potential for gaming.

“They are not doing anything different as a result of having some customers on a green tariff because they are already buying mix of green and non-green energy.”

Octopus’ Jackson agrees there is case for protecting the niche green operators.

“The question is how you allow companies like Good Energy, which has a 20 to 30-year track record pioneering green energy and finding the people who want the very greenest energy, to carry on a business that their customers clearly buy into while at the same time ensuring there isn’t a loophole.”

Jackson believes that a way round this could be to narrow any exemption to customers who have explicitly opted for a green tariff, who he likens to Body Shop customers prepared to pay a premium for ethically sourced cosmetics.

“Any exemption should only apply to customers who have chosen an explicitly green product.”

No exemptions

But Bulb, which says it derives all of its electricity from renewable sources, has broken ranks with the green camp by calling for no exemptions from the cap.

The company’s co-founder Hayden Wood says: “We think it’s really important that consumers are protected with the cap. Introducing a loophole reduces that protection.”

“I don’t think we should be exempt from the cap,” he says, adding that it should be possible to find the extra costs of sourcing renewable energy within the cap’s likely envelope.

He says that the additional costs of supplying green gas should be £25 to £50 per household per annum.

Labour has proposed an amendment to the price cap bill so that only tariffs, which draw their energy from wholly renewable sources, should qualify for an exemption from the price cap.

That would still allow companies to game the exemption, says Wood: “The idea of a 100 per cent tariff is not enough: the important measure is the supplier’s (overall) fuel mix.”

Good Energy has raised concerns though that removing the exemption for green tariffs threatens to undermine investment in renewable energy.

It warns about the risk of a “hiatus” in investment in renewable energy generation, which could “negatively impact the country’s transition to lower carbon energy systems”.

The firm’s chief executive Juliet Davenport told MPs, when presenting evidence to MPs, that initiatives like her firm’s joint initiative with Cornwall’s Eden Centre entailed set up costs that would be hard to afford within the constraints of a cap.

But, pointing to research published by his own company last week, Aurora’s Howard suggests that this case for subsidising renewable project is being over-taken by the market.

He says: “It’s getting to the point where they don’t need support. We are seeing the entry of projects on an unsubsidised basis.”

Lifting the exemption provides a tricky dilemma for Perry, who has been tasked with piloting the price cap legislation through Parliament by Theresa May.

The self-confessed eco-warrior may have to spend some of the political capital she has built up since last summer in environmental circles in order to meet the prime minister’s goal of lower energy bills.