The UK Government has called for comments and suggestions on its plan to build a modern industrial strategy which will deliver an economy that works for everyone. Here is the Global Warming Policy Forum’s submission to the consultation.
What are the most important steps the government should take to limit energy costs over the long-term?
The cost of Britain’s unilateral renewable energy policies is running out of control, the inevitable result of replacing cheap and reliable energy with expensive, intermittent sources. In 2016, the combined costs of the Levy Control Framework (LCF) and carbon taxes reached over £9 billion. These costs are all ultimately paid by businesses and households, and they are making the British economy less competitive. The Climate Change Act will cost the UK economy over £300 billion by 2030, and this figure is net of the wholesale cost savings from using renewables.
The Renewables Obligation scheme is currently set to last until 2037, and Contracts for Difference have a standard contract length of 15 years. So even swift action today may have a delayed impact in reducing energy costs. Before the Government can make headway, it needs to acknowledge that renewable energy is far more expensive than other forms of energy, and therefore it is misleading to speak of the ‘economic benefits of the transition to a low-carbon economy’. This instead comes at a net cost to the economy, to be measured against benefits that would only materialise if there was a level playing field of global action to reduce CO2 emissions. Putting an arbitrarily high carbon tax on electricity generation does not change the underlying cost of fossil fuel technologies, which deliver reliable energy at the lowest cost. It simply increases the cost of energy pari passu.
An alternative approach has been suggested by the House of Lords Economic Affairs Committee. Its latest recommendation is for a more flexible approach, one without the need for fixed carbon budgets. So long as the Government is bound by rigid five-yearly decarbonisation targets, there is limited scope for reducing energy costs for households and businesses. Only through abolishing Britain’s carbon budgets can the UK hope to take full advantage of low-cost technologies and give proper weight to the importance of tackling the scourge of fuel poverty and improving the competitiveness of the UK economy. Carbon dioxide abatement should only accelerate when low carbon sources are genuinely competitive with fossil fuels.
How can we move towards a position in which energy is supplied by competitive markets without the requirement for on-going subsidy?
Britain is currently in the absurd situation that no new sources of electricity generation can be built without subsidies from consumer-funded levies. This is principally because successive governments have destroyed the energy market by mandating power generation from costly intermittent sources. New gas power plants are facing the prospect of being used increasingly as back-up for renewables and charged high carbon taxes only then to be subsidised through the capacity mechanism to ensure their viability; a circular and wasteful strategy. Even the prospect of these capacity market payments has struggled to incentivise new gas power plants.
New low-carbon technologies may one day become competitive with fossil fuels, but this has not happened yet. Consequently, the current programme of five-year carbon budgets is imposing prohibitive costs for consumers today, but without the promised ‘first-mover’ advantage for the UK economy. Renewable energy lobbyists often claim that the costs of various technologies are coming down at a rapid rate. Claims that renewable sources of energy are now competitive with fossil fuels should be put to the test by the removal of subsidies.
The UK’s Carbon Floor Price means that British businesses pay a higher carbon taxes even than our nearest competitors in Europe. The government then has to pay compensation to energy-intensive industries, without which they would not be able to remain competitive. This complex web of taxes, subsidies and compensation, often counteract each other, but are always ultimately paid by consumers.
Instead of promoting expensive and environmentally damaging energy sources such as wind and biomass, the Government should prioritise removing barriers which prevent the cheapest and most reliable forms of energy from competing in a free market. Some operators of gas power stations have demanded a higher carbon price so they are more competitive compared with coal, but this approach would lead to higher energy bills for consumers. Following the UK’s exit from the European Union, the Government should completely rethink energy policy and put value-for-money and international competitiveness at the heart of its approach. There is no other option if Britain is going to succeed in the face of growing competition from the rest of the world. This approach should focus on simplification; untangling the inefficient mess of policy mechanisms that exist at present.
Looking ahead, as US experience clearly demonstrates, there could be substantial reductions in gas prices from the development of British shale gas resources. A key factor preventing the growth of the sector has been the length of time it takes to get planning permissions. The Government should work with local authorities to streamline this vital process. The fact that gas prices in the United States are around half those in the UK, gives an indication of the benefits to society as a whole, including the localities concerned, from allowing investment in this sector to go ahead.
How can government, business and researchers work together to develop the competitive opportunities from innovation in energy and our existing industrial strengths?
Government, businesses and researchers all working together sounds suspiciously like collusion. The Government should try and make sure this happens less often and should guard against corporate lobbying attempts, which leave taxpayers worse off. After leaving office, former Energy Secretary Ed Davey walked straight into three advisory roles with renewable energy companies; unmistakable evidence of a ‘revolving door’ between big business and government. The power of lobbying interests can be seen clearly in the fiasco surrounding the Swansea Bay tidal lagoon. This project, promoted by another former energy minister, is expected to be formally rubber-stamped by Government in the next few weeks despite being a completely uneconomic technology, even when compared to other poorly-priced renewables. Stronger safeguards against corporate lobbying will lead to better value for the taxpayer and a more competitive energy sector.
How can government support businesses in realising cost savings through greater resource and energy efficiency?
The main way to ‘support’ business through reducing energy costs is to pursue an energy policy which makes possible the use of cheap and reliable energy, rather than mandating the use of expensive and unreliable sources of energy, such as wind and solar.
Any attempts to combine energy efficiency policies with those to reduce emissions should be resisted. Independent studies for the UK and EU governments have found that targeting energy efficiency to reduce carbon dioxide is far more expensive than simply targeting carbon dioxide reductions alone or even the share of renewable energy. One such example was Enerdata’s February 2014 paper for the Department for Energy and Climate Change, which found that the EU’s 40% greenhouse gas reduction target for 2030 was over three times more expensive to achieve in the presence of a 30% energy efficiency target. Consequently, for such a strategy to be successful in reducing business costs, the Government should entirely separate its decarbonisation agenda with attempts to improve energy efficiency.