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Dieter Helm: UK Energy Plan Is Dangerous And Dated

Dieter Helm, Financial Times

After 12 years of reviews, white papers and some legislation, the UK government has finally come forward with what it regards as a definitive set of energy policy reforms. Sadly the Energy bill is anything but definitive. Over the long period of the bill’s gestation, the world’s energy markets have changed radically.

At the heart of the bill is the idea that the government should contract directly for new power stations, agreeing in advance a fixed price for the electricity they will generate. Contracting is not in itself a bad idea. Britain needs investment, much more than the market will deliver left to its own devices. The upfront capital required to develop nuclear power stations, in particular, requires political commitment. But there is a world of difference between auctioning contracts and politicians fixing them.

Once the government is picking the winners, it matters which sectors it chooses. Ed Davey, the energy secretary, comes armed with explanations. He predicts the future will be one of “volatile” gas prices, which will head ever upwards. And Mr Davey believes that his chosen technologies will insulate Britain against them.

For the past decade, gas prices have indeed been rising. But it is one thing to know the past and another to know the future. While officials and ministers have been working away at one energy plan after another, the world around them has changed. The idea of “peak oil” (the point at which the world’s oil supplies go into irreversible decline) has turned out to be nonsense. There has been a revolution in fossil fuel technologies. With shale oil and gas, North America is rapidly reaching energy independence and the price gap between the US and Europe on gas is now so enormous as to undermine Europe’s competitiveness and begin a process of re-industrialisation in the US. America’s shale bounty will feed through to world prices – and therefore Britain’s prices.

If this part of the rationale behind the energy bill has collapsed, it might be argued that the government is at least doing something about climate change. But a moment’s reflection yields the unfortunate conclusion that not only are current renewables making little difference to global warming but that they never could. Wind in particular is a low-density, intermittent energy source. Future renewables might well close the gap, but not the current forms of renewable energy.

Before deciding which technologies to award government contracts to, it would be wise to think through what might happen if the secretary of state turns out to be wrong. Power stations tend to be long-lived, which means that mistakes hang around the economy’s neck for a long time. Suppose the future is not going to be the one conjured up by the peak oil brigade, the supporters of current renewables, and by the secretary of state. Suppose world fossil fuel prices fall but Britain is committed to high- cost current renewables.

The UK’s carbon production might indeed fall: the deindustrialisation that might result from high energy prices is a sure route to lower emissions. But that would be a false blessing, offset by carbon-intensive imports, as is already happening. Energy demand would probably fall, too – not because of the Green Deal, Mr Davey’s programme to increase British homes’ energy efficiency, but because of higher prices. Reducing emissions by contracting energy-intensive industries and reducing household incomes is hardly an attractive route to decarbonisation. ‬

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