Important blog on UK energy policy

Nick Butler is a regular writer/blogger in the Financial Times and his recent blog reflects on the state of British energy policy, or the lack thereof. There is so much written about UK energy policy but this is a good one for those outside the UK to get a better idea of just what is going on.

Can UK energy policy be rescued?

Spare a thought on this bright summer’s day for two men struggling to reconcile truth and political reality.

Oliver Letwin, Cabinet Office Minister in the UK government and Jo Johnson MP, head of the No 10 policy unit, have the task of writing the first draft of the Tory Party’s manifesto for the election next May. The manifesto will have to include something on energy policy.

Both Mr Johnson and Mr Letwin are decent men who can generally be relied upon to speak and act honestly and honourably. That is where their problems begin. On energy policy how can they tell the truth about a policy which by common consent – among business, academics and the serious NGOs – is a costly failure?

Energy costs are rising not because of market prices (European natural gas prices are at a new low despite the continuing conflict over Ukraine and deep instability in North and West Africa) but because of government support for renewables, which is gradually feeding through to energy bills. These costs will rise further as more offshore wind and eventually new nuclear comes on stream. Meanwhile US energy costs continue to fall to the competitive benefit of US industry and the detriment of companies here and across Europe.

Shale gas, promised as a holy grail, remains undeveloped despite the prime minister’s rhetorical support – a point noted in an article last week by Mr Johnson’s brother, Boris. As a result the UK is becoming ever more reliant on imports.

Despite all the money devoted to the issue, greenhouse gas emissions on the government’s figures are down only fractionally over five years – a fall which can mostly be attributed to low economic growth. In the absence of an effective carbon price, coal consumption has risen by 22 per cent over the same period.

Necessary investment is down especially in power generating capacity because the incentive required to bring in private capital has been forced out of the system. The government’s desperate remedy has been to force the National Grid to buy back up generating capacity in order to ensure that the lights will stay on. We are getting close to a renationalisation of the whole system.

None of this can be stated openly because energy policy, although led by the Liberal Democrats, comes within the collective responsibility of the Coalition. What’s done is done and the only way forward is to find a rational way of unraveling an unhappy mess. In drafting the manifesto Messrs Letwin and Johnson would be best advised to go back to first principles. They should start with balance, realism and competition.

Governments exist to balance different interests and objectives within society. When it comes to energy policy those objectives are energy security, costs and competitiveness and the reduction of emissions. I assume these three objectives will stand, despite some divisions within the Tory party on climate change and that the additional, serious issue of energy poverty is best managed not through the energy supply system but through measures to tackle poverty itself.

This theme of balance and the question of whether different objectives can be reconciled will be the core issue at an important CBI conference on energy policy next week. Business in general is bothered both by level of costs and by the way in which energy policy has been politicised, adding to uncertainty and increasing risks.

Those in office must define where they wish to strike the balance. For the last five years since the passage of the Climate Change Act of 2008, the priority in the UK, as in Europe, has been firmly set on the reduction of emissions. That is why new offshore wind power is being commissioned at £150 per MWh. It is also why Europe was so unprepared for the possibility of a supply shortage caused by Russian action in Ukraine. The balance now requires some correction.

Rebalancing policy should proceed from realism. The challenge of reducing global emissions cannot be solved in one country, and it looks highly unlikely to be resolved by a global deal. Public policy to be serious must be proportionate to the problem being addressed.

The best thing the UK could do to help resolve a global problem is to invest in world leading science which can help to produce new ways of producing, storing and consuming energy. If Tim Berners Lee can help create a stunningly effective communications system called the internet why can’t some of our best scientists be challenged and funded to find a way of moving the energy system away from the climate risks and towards sustainability? Like the internet the products of any successful research would soon spread and would help resolve the real challenges – the inexorable growth in emissions in China and India.

A realistic government would also stop assuming that gas prices will inexorably rise when all the evidence is that gas to gas competition is breaking the link to oil prices. As any gas producer could tell you, the price trend is down not up. Realists would also recognise that in a hybrid system the role of government is not to be the investor of last resort but to set a framework of policy which encourages private capital to invest in order that the desired objectives can be met in the most efficient way.

On the cost issue the answer must lie in competition rather than a price freeze. The fundamental error of the Electricity Market Reform process is that is protectionist in nature. Companies are guaranteed revenue and the incentives to reduce costs once the deals are signed is minimal. Deals which guarantee index linked prices – from a starting point way above the current wholesale price for 15, 20 or in the case of new nuclear for 35 years are indefensible. Each element of the system should be competitive, with performance incentives which allow suppliers and consumers a share of the benefits if the providers succeed in bringing costs and prices down. EMR should be scrapped and a review process created to come up with the details of a better scheme which can be implemented once the election is over.

Balance, realism and competition are the right principles. I hope Messrs Letwin and Johnson (and indeed those making policy for the other parties) have the nerve to adopt them. The issue is too important – economically and politically – to turn a blind eye to the obvious failures of the current approach.