Ofgem forecasts £9bn windfall profits for electricity generators

Ofgem has calculated that electricity generators will make £9 billion in windfall profits during the second phase of the EU emissions trading scheme.

Energy regulator Ofgem has called on the government to claw back the windfall profits it expects generators to make from the EU emissions trading scheme (EUETS) and use the money to cut fuel poverty.

Power generators have come under fire for making windfall profits running into billions of pounds from the EUETS by passing on the full cost of their EU emission allowances to customers, even though they received most of them for free. UK generators are estimated to have made £800 million in windfall profits in the scheme’s first year (ENDS Report 372, pp 18-19 ).

Ofgem has long argued for the end of free allocations to the energy sector to address this issue. It now calculates the sector will make £9 billion in windfall profits between 2008-2012. This astronomical figure assumes the generators pass on the full price of carbon dioxide emission allowances - based on today’s prices - to customers, even though they will receive allowances covering about 70% of their projected emissions for free.

In December, the Spanish Parliament backed a new law that will see Spanish generators pay back about €1.4 billion a year during the second phase. Ofgem wants the UK government to take similar action and use the money to help the poorer customers "who have been hardest hit by recent energy price rises".

The electricity sector denied it was making windfall profits. "When limits and permits were introduced three years ago, the UK generating industry was the only sector that had to cut its emissions," said David Porter, chief executive of the Association of Electricity Producers.

"To stay within those limits and keep the lights on, electricity companies have had to run their plant differently, often at higher than normal cost," Mr Porter said.

Ofgem calculates that UK climate policies are adding about 8% a year to the average electricity bill and 3% to the average gas bill, adding up to more than £80 a year for the average customer (see figure).

The EUETS is expected to cost customers £31 in 2008, while the UK’s carbon emissions reduction target (CERT) that will replace the energy efficiency commitment in April will add £38.

Meanwhile the government’s renewables obligation adds about £10 to annual electricity bills and this is set to rise to £20 by 2015. Finally, upgrading the transmission network to cope with new renewable capacity will cost each customer more than £2 a year.

"High fuel bills aren’t the fault of clean energy solutions," said Greenpeace campaigner Ben Ayliffe.

"It’s the rocketing expense of oil and gas that’s to blame, as well as the increasing need for these fuels to meet the full costs of the environmental damage they’re doing. These green measures will help the UK to reduce its energy usage, increase the profitability of business, reduce our dependence on foreign energy supplies and help tackle climate change," he said.

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