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Memorandum submitted by the Global Warming Foundation Policy to the Energy and Climate Change Select Committee, House of Commons, June 2012

1. With the publication of its draft Energy Bill, the government has announced its intention to reverse even further and decisively the course of energy deregulation.

2. The Global Warming Policy Foundation warns that any attempt to turn back the clock to the dark period of centralised energy planning will not only damage Britain’s economy, but will almost certainly end in failure, just like other attempts to impose a centralised system of energy controls have failed in the past.

3. The Energy Bill constitutes a disastrous move towards a centrally planned energy economy with a high level of control over which forms of energy generation will be favoured and which will be stifled. The government even seeks to regulate the prices and profits of energy generation.

4. The overriding goal of the Energy Bill is to promote investment in expensive, low-carbon forms of electricity generation. It outlines measures to reshape the electricity market and encourage investment in uneconomic energy generation that would not otherwise be invested in.

5. At the heart of the Queen’s Speech was a government promise to introduce policies that aim to help families and businesses. But this is seriously undermined by its commitment to an Energy Bill that will significantly increase the cost of electricity.

6. Most energy analysts agree that these proposals will hike up energy costs for both households and businesses, while injecting more than £100 billions into areas of green energy generation, such as wind power, that are inherently unreliable.

7. The latest forecast by Credit Suisse estimates that power prices in the UK will increase by more than 60% by 2020 if these measures are introduced. At a time where many people are already facing economic hardship, the government’s energy bill will have a significant and growing adverse impact on both business costs and living standards.

8. The government bases the case for green – and more expensive – energy in large part on the misguided assumption that gas prices will significantly rise in the future. This argument is no longer credible in the light of the growing international abundance of shale gas, not to mention the likely shale gas potential in Britain itself.

9. North American gas prices have dropped from $15 per million British thermal units to below $2 in just 7 years. This price collapse is an indication of things to come in Europe, once its own vast shale deposits are allowed to be extracted.

10.According to a recent report (Golden Rules for a Golden Age of Gas) by the International Energy Agency (IEA), a global boom in unconventional natural gas over the next 20 years together with the influx of cheap natural gas from the US will increase competition on global gas markets and cut gas prices by up to 30% by 2020. The main benefit for Britain will be that the significant growth of exports of liquefied natural gas (LNG) will reduce gas import prices, regardless of the magnitude of Britain’s own shale gas development.

11.In the light of this, it is a matter for deep concern that the Government has told Parliament that it cannot guarantee that it will put no further impediments in the way of the rapid development of UK shale gas. In the meantime, there are warnings that a third of UK families may be struggling to pay their energy bills by 2015 as a result of further price increases.

12.At a time when most major economies (e.g. USA, Germany) are gradually returning to cheap and abundant fossil fuels, mainly in form of coal and natural gas, Britain alone seems prepared to sacrifice its economic competitiveness and recovery by opting for the most expensive forms of energy.

13.In any case, the complex and inconsistent measures of the draft Energy Bill are unlikely to provide investors with the certainty they require to make substantial investments.

14.The proposed contracts for difference (CfDs) are contracts between the generator and the government, where the government will make a top-up payment to ensure the generator receives the agreed tariff. A consequence of these contracts is that utility companies will be obliged to purchase electricity at higher prices for green energy from the generator. This cost in turn will be passed on to consumers. There will be a strong incentive to opt out of investing in network electricity supply in order to avoid the high costs of electricity due to renewable energy charges.

15.The contracts for difference (CfDs) are extremely complex and convoluted. Neither the profit guarantees offered for different technologies nor the duration of CfDs is known. The government has not provided any numbers and price guarantees for its favoured green technologies. Investors are therefore thrown into limbo since they cannot calculate whether expensive renewables or nuclear reactors are viable and can compete with less expensive conventional power plants.

16.This lack of clarity will inevitably lead to constant government amendments and continual intervention, which will act as additional barriers to new entrants in the UK electricity market.

17.In the light of government indecision and investors’ uncertainty, the Energy Bill proposes to give the Secretary of State the authority, without any parliamentary approval, to offer green energy companies ‘letters of comfort,’ promising them that they will be guaranteed profits once the specifics of CfDs are finalised and introduced. This is both arbitrary and unconstitutional.

18.The Carbon Price Floor (CPF) is a unilateral measure that sets businesses a minimum price for emitting CO2. The UK will therefore have a unilateral and additional carbon price that is higher than the price of the EU Emissions Trading Scheme. This means that UK industry, which is competing not only with other EU countries, but also with the rest of the world (which has no ETS burden at all), will face extra costs of £250m in 2013 and £1.2b annually by 2020.

19.The government’s Energy Bill is influenced by the UK’s unilateral renewable energy and carbon dioxide (CO2) emissions targets, as well as by maintaining the claim to be the “Greenest Government ever.” The energy bill will hike up both business costs and the cost of living to consumers, while injecting money into areas of energy generation, such as wind power, that have proven to be unreliable providers of electricity.

20.In the absence of an international agreement on CO2 emissions, the Energy Bill would make UK businesses and the economy as a whole, less competitive. It would impose an additional and substantial penalty on manufacturing in Britain, and act as a further deterrent to investment in manufacturing

21.Moreover, it is doubtful that what is proposed is actually workable, let alone economically viable. After all, similar interventions in the past have proved unworkable as well as uneconomic. They will almost certainly prove to be highly unpopular when the costs of these measures are reflected in energy bills.

House of Common – Energy and Climate Change Select Committee