Musings from The Oil Patch
Comment of the Day

May 22 2012

Commentary by Eoin Treacy

Musings from The Oil Patch

Thanks to a subscriber for this edition of Allen Brooks ever interesting report on the energy sector for PPHB. It is posted without further comment but here is a section on the cost of the UK's renewable energy:
We found the comments about the impact of rising natural gas prices and the impact of renewables on energy bills very interesting. It is even more so when one understands that only 63% of a homeowner's electricity bill is related to the wholesale price of energy. As reported by Ofgem, the medium annual electricity bill in the UK is £424 ($670.70), based on 3,300 kilowatt-hours (kWh) of consumption, or about 0.1285 pounds ($0.20) per kWh. Given the average bill, £267.12 ($422.54) represents the fuel component. The incremental costs for wind and renewables seem reasonable, but we are hard pressed to think that gas prices have contributed nearly half of the electricity fuel bills. If, however, we add the fuel component of electricity to the share of the gas bill, then we are talking about a total fuel component equal to £656.24 ($1,038.07), which says that the high cost of gas impacted the bill by nearly 20%. That doesn't fit with the statement from Ecotricity that the impact was 10%. We conclude that Ecotricity related the gas cost to the combined gross electricity and gas bills, which is the wrong analysis since there are components of customer bills that are unrelated to commodity market forces such as the cost of distribution and transmission (regulated by Ofgem), meter costs and valued added taxes. The environmental component relates to the government programs to save energy, reduce emissions and deal with climate change. According to Exhibit 8, environmental program costs account for 10% of gross electricity bills and 4% of gas bills. Combined the environmental component impact on the consumer's energy bill is 6.5% of the total.
Back to top