Britain deludes itself that it is setting an example to the world by decarbonising faster. The UK is unlikely to be able to manufacture attractive high-value exports if its energy costs are higher than the competition.
As Britain relaunches itself as an independent trading nation, its fate will depend on how competitive it is. We have lots going for us, but we also have a heavily regulated economy, high labour costs and low productivity, so we may be in for a shock. And there is one slug of self-inflicted burdens that we are in the process of making much worse, perhaps crippling: our energy policy.
Britain has uniquely legislated to reach net-zero carbon dioxide emissions in 2050, which means going cold turkey on the 85% of our energy that currently comes from gas, oil and coal. That means finding ways to run not just the electricity grid, which is about 20% of our energy, without net emissions, but all our heating, transport and industrial processes too. Surprisingly, the Committee on Climate Change failed to produce a detailed costing of this ambition before recommending it, but reputable estimates put the cost at around £3 trillion in the absence of any breakthrough in nuclear fusion or carbon capture.
The cost of some existing policies is already being passed on to consumers at the rate of £10 billion a year. Subsidies for wind, solar and biomass electricity have made household electricity prices about 35% higher than they would otherwise have been, according to the government’s own estimates. The prices paid by businesses – which are also passed on to consumers in the prices of products and services – are more like 60% higher. Industrial electricity prices here are among the highest in the world. That is a big drag on competitiveness, and is a large part of the explanation of our falling within-country emissions. Carbon dioxide has been one of the most successful exports of the last decade.
The main beneficiaries from these policies are the renewable energy industry, and the government itself, which charges VAT on top of these subsidies. Fortunately for politicians the pain of these increases has been dulled by two factors: first, a fall in gas and oil prices during the past decade; and second, a decline in the quantity of electricity consumed. Had this not happened, as Professor Dieter Helm of Oxford University wrote in 2017, “there would then have been a serious capacity crunch and much higher prices.”
The world, and Asia in particular, is electrifying more and more processes, because it is such a versatile and efficient source of power, but we and the EU seem to be moving in the other direction. One of the reasons for the fall in electricity consumption is the emigration of industry to cheaper locations. An EU study published last year showed that industrial electricity in the EU28 is not only 50% more expensive than in the G20, it is actually more expensive than domestic retail electricity in the G20. No wonder factories are moving. We have already lost our aluminium industry and much of our steel industry. We still need these materials but we import them from countries with higher emissions, which makes no sense. Even our successful digital economy is not immune to energy costs: server farms are huge users of power. High energy costs are a non-tariff barrier against our own exports.
Energy is not just another raw material, like paper or cement. It’s the very source of wealth. An economy is a thermodynamic engine, creating useful structures and patterns by harnessing energy to undo entropy. High energy costs are extremely dangerous for an economy over time. They become embedded in the costs of the capital they create and they deter experimental innovation. The Germans are now recognising that their extremely expensive Energiewende has poisoned their export economy, and only an undervalued exchange rate is keeping the show on the road.
In the past few weeks, the government has made a string of announcements relating to energy, all attempting to appease the green lobby. Every single one will raise costs to consumers but reward special-interest lobbies of crony capitalists: building HS2 at public expense, complete with its own trackside wind farms; backing off Heathrow’s privately funded third runway; bringing forward the date of banning diesel and electric cars; banning coal and wet-wood stoves used by the less well off in rural areas; mandating the use of subsidised ethanol from wheat; reopening subsidy schemes to wind and solar power. In that last case, ministers argue that onshore wind power is now cheaper than fossil-fuel power and no longer needs subsidies, so they have reopened the subsidies for it. Eh?
The falling cost of offshore wind power is a big myth, by the way. The system cost, connections and back-up required to stabilise a grid relying heavily on intermittent energy is huge, growing and not included in the headline figure for wind subsidy. On top of that, two studies have now confirmed that capital expenditure per megawatt of new capacity in the wind industry has not fallen significantly. Gordon Hughes, CapellAris and John Constable presented public-domain data suggesting that capex in offshore wind was falling only slightly due to technical progress, and that this was completely offset by moving into deeper water. And economists at the University of Aberdeen used a different data set to come to almost the same conclusion, that it will still cost £100 per MWh to get electricity from UK offshore wind farms.
So why are the operators of offshore wind farms bidding lower prices than this? The subsidies take the form of “Contracts for Difference”, but these are misnamed. They are not binding futures contracts, obliging the generator to supply at a bid price. The penalty for non-supply is trivial. The CfDthus gives the generator an entitlement to a price, but puts them under no binding obligation to supply.
As John Constable of the Renewable Energy Foundation puts it: “Consequently, generators have bid very low in order to obtain an entitlement to a price, and an option for development. This option secures a market position, inhibits competition, and generates excellent public relations. In essence the generators are gambling on future market prices rising above the CfD for whatever reason, in which case they will bail out and take the market price.”
In the case of transport, fuel tax is already exceedingly high in this country, leading many hauliers who come here from the continent to carry extra diesel tanks so they don’t have to refuel while here. Insisting on biofuels will increase the underlying cost and that will be multiplied by Fuel Duty (is that the Chancellor’s cunning plan?). In any case, it takes almost as much diesel and gas to plant, fertilise and harvest a crop of wheat as you get ethanol out of it.
Britain deludes itself that it is setting an example to the world by decarbonising faster. But China, India and even Germany are still building hundreds of coal-fired power stations. The UK is unlikely to be able to manufacture attractive high-value exports if its energy costs are higher than the competition.
Nor can we sell the energy technologies themselves. The experience of Scotland clearly shows that even when government colludes with the renewables industry, there is almost no local employment in the manufacture of wind turbine parts, because renewables are already expensive, and insisting on substantial local content drives up costs still further. Wind turbines will not be made in the United Kingdom, unless labour costs are driven down, and the only way to do that is to force down living standards. Does that sound like good politics to you? Me neither.
The purpose of decarbonisation is to alter the climate for the better. Yet nobody in their right mind thinks that net zero emissions will prevent wet winters and flooding. Such bad weather happened in the past anyway, and flood prevention and mitigation would be necessary even if the climate ceased warming. Rather than wasting money on subsidies to renewables, how about some flood defences? They work!