"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!
Our energy policy is centrally planned but it resembles the practice
under fascist regimes rather than socialist ones, because it rewards
favoured private firms. As Dieter Helm wrote in 2017: “In the current
decade, the government has moved from mainly market-determined
investments to a new context in which almost all new electricity
investments are determined by the state through direct and often
technology-specific contracts. Government has got into the business of
‘picking winners’. Unfortunately, losers are good at picking
governments, and inevitably – as in most such picking-winners strategies
– the results end up being vulnerable to lobbying, to the general
detriment of household and industrial customers.”
I fear that the Conservatives have fallen into the error of thinking
of the nation as a business. This is both illiberal and makes the
classic mistake of answering to the interests of producers rather than
consumers. Businesses are command economies on the inside (which is
why business people generally speaking do not make good
politicians). But populations and the nation states they create to
represent their common interests are not businesses: they
are voluntary collaborations. The green agenda, as with any ‘crisis’,
gives a pretext for the creation of a command economy. If we continue
down this road it will not only make us uncompetitive, but also, like
all the other corrupt and inefficient command economies before us, very,
very dirty."
