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Nick Butler: Britain’s New Government & Climate Policy Failure

In 2008, energy was an issue on which there was a very broad consensus of agreement across the main parties. That consensus is now gradually breaking down.

The election is over and against all expectations we have a clear result. When it comes to energy policy, however, the agenda will be set not by what the Conservative party has promised in its manifesto but by external events. A number of looming issues are already obvious and the government will have no control over most of them.

The first is the further postponement of the plans for nuclear development starting at Hinkley Point in Somerset. Two new reactors capable of supplying some 7 per cent of total UK electricity demand are planned. The first was originally supposed to be on stream in time to cook Christmas dinner in 2017. But despite the prospect of a lavish price — index linked for 35 years regardless of what happens to global energy prices – and £10bn of even more generous financial guarantees, funding for the investment required is not in place. The reluctance of investors to commit will not be helped by the technical problems in the reactor vessels, which are now under investigation by the French nuclear regulator. This problem has widespread implications for the companies involved (Areva and EDF) and for nuclear development in many countries across the world, starting with France itself.

I will come back to those wider issues in a future post. In the UK, the challenge for the new government is that development that is already seven years behind schedule will be further delayed (no station here can go ahead until at least one EPR reactor is working somewhere in the world). The new problems are likely to increase still further the amount of financial guarantees required. This will all push up the final price consumers will have to pay. At worst, the current regulatory tests could require the reactor vessels to be redesigned and rebuilt. That could extend the delay well into the 2020s, leaving a gap in supplies that the government will have to fill by approving either more expensive off-shore wind capacity or a new series of gas-fired stations and sacrificing some of the more ambitious targets for reducing emissions. A decision on that choice will have to be taken within the next year.

Also coming to a head within the next 12 months is the problem of the future of the North Sea. As Bob Dudley, CEO of BP, said a couple of weeks ago, the North Sea faces a massive shock. In his view, “decline is inevitable and the industry there is heading into a profound period of downsizing”. Costs are very high by international standards. Tax cuts as promised by the last government will only help those paying tax, and make little difference to those whose operations are marginal or loss making at an oil price of $60. Many operators are small companies, funded by debt. In a number of cases that debt will run out at the end of 2015, triggering a brutal round of restructuring. A new government will soon find that the complacency of recent months, reinforced in the last few weeks by a temporary surge in prices, is giving way to a miserable new reality — with investment, employment and output all falling. The changed political situation in Scotland makes the question of whether and how any UK government intervenes all the more sensitive.

The third challenge is the failure of the much-vaunted UK shale gas revolution. Shale gas was once described by prime minister David Cameron as a way of bringing down gas prices for consumers and reindustrialising Britain with low-cost energy supplies. There is certainly a substantial resource base, even if the claims that a 100 billion barrels of oil are waiting to be developed in Sussex prove to be exaggerated. But if local councils will not approve drilling and if central government will not override those local decisions the shale revolution will never happen.

More serious is the fourth issue, and it goes to the heart of national energy policy, which since 2008 has been focused not on security of supply or costs but on climate change and the reduction of emissions through a forced change in the energy mix.

A modest reduction in emissions has been achieved but that is probably the result of low economic growth rather than energy policy. The problem is that the provisions of the 2008 act were designed to fit within a European and global deal which would ensure that the costs were shared and that a move to expensive low-carbon fuels would not make Europe uncompetitive. The reality is that there is no global deal, and even in Europe there is no effective carbon price. Nor is any progress being made to develop carbon capture and storage technology, which was supposed to take the carbon out of coal and gas because of German opposition. The main achievement of the current policies is that industrial activity continues to move out of Europe to the US — where energy costs are lower — and to emerging markets, where regulation is looser. Relocation costs jobs but does nothing to reduce global emissions.

The UN Paris conference at the end of this year will be the moment at which the failure of current policy becomes obvious. Vague commitments to reduce future emissions do not amount to a global deal. Sooner or later a new government (and indeed the EU) will have to accept that the current approach has failed and that since the risks remain unchanged a different approach is necessary.

Beyond these four issues there are numerous further pieces of unfinished business. The handover of Sellafield to new management under the Nuclear Decommissioning Authority is not going well; nor is the programme to introduce smart meters. The retail market for both gas and electricity has lost consumer trust, and some of the companies involved may have lost the will to remain in business.

This is a sector where the boundary line between public policy and private investment decisions is blurred and complex decisions made in Whitehall matter. The Tories, having embraced nuclear power now seem distrustful of the companies involved and ready to look for practical alternatives. Privately many MPs and advisers accept that current climate policy is failing but no one has yet said so in public. A minority are openly sceptical about climate change. Others believe in global warming, but not in the policies imposed over the last five years by Liberal Democrat ministers.

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