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Heren & Constable: An Alternative To Our Reckless Energy Gamble

Patrick Heren and John Constable, Standpoint Magazine

Consumers and politicians must stand up to the greens for a whole range of reasons, not least of which is that the future of the climate is not safe in their hands.

There is an unexpected parallel between our energy policy and the self-deception and wishful thinking exhibited by the mishandling of intelligence in the run-up to the invasion of Iraq in 2003. The Blair government ignored warnings about the reliability of sources, some of whom were fantasists, and “sexed up” whatever evidence it thought it did have. In an alarmingly similar fashion, successive British governments since the White Paper of the same year have been basing energy and climate change policy on questionable evidence, much from visionary green NGOs, dubious assumptions about future oil and gas prices and flawed reasoning about the beneficial effects of current renewable generation technologies.

The thrust of this policy — unfortunately supported by all three main parties — is to offer heavy subsidies, mostly for wind power, by means of levies on energy bills: a regressive wealth transfer from consumers to investors in renewables and to large utilities. The scale of these burdens, already significant at about £2.2 billion a year, is set to grow dramatically as we struggle to reach the 2020 targets set by the European Union’s Renewables Directive.

This makes UK energy policy the world’s biggest position in gas, since it is a bet that prices of fossil fuels will very quickly rise to high levels and stay there for the foreseeable future. If that fails to occur then renewables policies are going to look extremely foolish. Moreover, if government really believes in its own wager on renewables versus gas, why it is necessary to offer very generous 20-year subsidy contracts to developers of technologies that will be competitive within a decade?

In order to meet those EU 2020 targets for renewable energy Britain must derive at least 30 per cent of electricity consumed from renewable sources, in addition to 12 per cent of heat and 10 per cent of transport fuels. The cost of the heat subsidies is to be met from general tax revenue (about £450 million a year in 2020), while renewable transport fuels will cost motorists upwards of £1 billion a year in 2020, on top of the £33 billion of tax already levied on petrol and diesel — with economic consequences that are too little considered.

These are hardly negligible figures, but the main concern relates to renewable electricity, which has to provide about half the target quantity. We can estimate the costs from the current subsidy mechanism, the Renewables Obligation (RO), which is scheduled to run until 2017; generators registered before that date will continue to qualify for subsidies. The government hopes that the replacement mechanism, the awkwardly named Feed-in Tariffs with Contracts for Difference (FiTs-CfDs), will offer some savings; but there is every reason to doubt this because the underlying costs of the technologies have not changed much.

Using the RO costs, and the rough technology mix of the government’s central scenario, we can calculate that the subsidy required in 2020 will be in the region of £8 billion a year. This figure is astonishing but not controversial: even the Committee on Climate Change estimated that the cost will be about £7 billion a year, though Lord Turner, its then chairman, preferred to express this as an additional 2p a kilowatt hour (kWh), presumably because such a number is a halfpenny short of proverbial nothing and few people realise that the UK consumes about 330 billion kWh of electrical energy each year.

On top of the subsidy there will be grid and system management costs, which are much more difficult to estimate with confidence. However, Colin Gibson, a former power networks director for National Grid, has calculated that the systems impact of the wind power required by the targets could be in the region of £5 billion a year in 2020. Together with VAT the total additional cost to the consumer comes to about £14 billion a year, or 1 per cent of current GDP. The consequences of such a vast barnacle on the hull of the British economy should be obvious.

And it gets worse. There is very good evidence to suggest that the carbon price floor, introduced on April 1 this year, will add 40 per cent to the subsidy income of onshore wind farms and any built before 2017. This will be the result of a general increase in the wholesale price of electricity benefiting even those generators that do not pay the tax. If all renewable generators with planning consent are built before 2017, a not unreasonable assumption given the financial incentives, and that some of that in planning is also approved and built before that date, we calculate that this carbon price floor subsidy to renewables would amount to a further £2 billion a year

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