1 December 2015

Britain’s energy policy: Betting on a miracle


Ugly reality has broken into British energy policy. Last week’s speech by the climate and energy secretary Amber Rudd is a milestone that defines the end of the fantasy stage of the renewables fairy tale. Policy makers must now grapple with the distortions and dysfunctions they created. Something has gone badly wrong and Ms. Rudd is the first serving minister to speak out about it. As Ms. Rudd observed, ‘we now have an electricity system where no form of power generation, not even gas-fired power stations, can be built without government intervention.’ For this reason alone, in acknowledging there is a problem, her speech is an important and positive development.

The speech is also a conceptual breakthrough in government thinking with Ms. Rudd’s welcome recognition that weather-dependent wind and solar capacity impose their intermittency costs on the rest of the system. The way that wind and solar have been subsidised transfers their intermittency costs to traditional generators such as coal and gas-fired power stations. Intermittent generators should be responsible for the pressures they add to the system when the wind does not blow or the sun does not shine, the energy and climate secretary says in what is the single most important sentence in her speech.

Transferring intermittency costs from wind and solar to coal and gas means investors don’t invest in dependable capacity. This matters as they supply electricity on demand, which wind and solar can’t, and this is the root cause of Britain’s looming energy crunch and the narrowing supply margin. Not only are gas-fired power stations dependable, they are by far and away the lowest cost route to cutting carbon dioxide emissions, a route closed off by wind and solar. This is the crux of the policy dilemma.

On the one hand, the climate and energy secretary wants renewables to bear the intermittency costs they create for the rest of the system and she wants to be tough on subsidies. On the other, she wants more offshore windfarms. ‘The technology needs to move quickly to cost-competitiveness … If they don’t, there will be no subsidy.’ The policy makes no sense – if offshore wind is cost-competitive – which it won’t be – why subsidise it? But her speech sends a chilling message to wind investors: The cost of intermittency is now on the table and it won’t be taken off, heightening political risk.

The energy and climate secretary also wants to see new gas-fired power stations: ‘It’s imperative that we get new gas-fired power stations built.’ Last December’s capacity market auction brought hardly any new gas-fired capacity (only one of the nine schemes that pre-qualified got through). Incentivising more gas-fired capacity will add a further upward twist to the cost of electricity and to political risk. Other than small-scale, low capital cost peak generating plant, the sector is fast becoming uninvestable except for the Chinese state backed by Treasury guarantees.

Despite putting her finger on what’s wrong with subsidising renewables, policy is still deep in a maze of muddle and confusion. It is the end of the beginning rather than the beginning of the end. Here are the reasons why.

Security: The condition of being from or not exposed to danger; safety

Reliability: The quality of being reliable; in which reliance and confidence may be put

Security and secure were mentioned nearly twenty times by Ms. Rudd but having a reliable energy system warranted only three mentions. Security and reliability mean different things. Wind and solar may be secure – no one is going to steal them – but they are certainly not reliable. The more wind and solar on the grid, the more reliability is degraded. If reliability is the aim, you don’t do intermittent renewables. None. Until this semantic confusion is cleared up, it’s a pretty safe bet that policy will continue to head in the wrong direction.

Study history … In history lies all the secrets of statecraft – Winston Churchill

Amber Rudd gets some of the history right. In particular, her speech highlighted the importance of Nigel Lawson’s break with the post-war corporatist planning model in favour of market-driven investment and supply and Tony Blair’s negation of that when he foolishly signed Britain up to the most demanding renewables target in the EU. But her speech re-wrote history to talk down the achievements in order to depress expectations of current policy. In this re-telling, electricity privatization took five parliaments (it didn’t).  ‘I remain in awe of the key architects of privatisation who achieved so much in so little time,’ a power generator executive said in the 1990s. It comes to something when a government department is unable to present an accurate account of its single greatest policy achievement.

Similarly, history is re-written to normalise government intervention.  ‘Intervention was necessary then,’ Ms. Rudd claims. Policy was in the hands of the truly independent electricity regulator, which was taken away by Ed Miliband’s yet-to-be-repealed 2010 Energy Act. The main government intervention was to prop up the coal industry. The Thatcher government had put in place above market price supply contracts which caused political problems for the Major government then New Labour’s coal crisis of 1997/98 when they expired. One of the most remarkable features of feature of electricity privatisation was how little government intervention there was. If you don’t know what worked, chances are you’ll keep doing what fails.

The reader may care to note the use of the collectivist first person plural … These are typical specimens of a large genre. ‘We’ are in duty bound to bring deliverance from above – David Henderson, ‘Misguided Virtue’ (2001)

‘We need to build a new energy infrastructure;’ ‘we are building new interconnectors;’ ‘it is imperative we do not make the mistakes of the past and just build one nuclear power station.’ and, as the reader will already have noted, it is also imperative ‘we’ get new gas-fired power stations built.

Who is ‘we’?

In the days of privatisation, it was clear who did the building: Private companies or, in policy-speak, the private sector, investing on their own account at their own risk.  Today, the energy sector has been transformed into a vast, ill-defined Public Private Partnership. It brings the worst of all worlds – state control of investment funded by high cost private sector finance where price risk is transferred to customers and mounting political risk to investors.

In another example of re-writing history, Ms. Rudd claims that gas-fired power stations appeared because of government support. The precise opposite is the case. Until 1990, the European Commission forbade the use of gas to generate electricity and the nationalised British Gas thought natural gas too precious to be used in power stations. In fact, Britain’s dash-for-gas was triggered by the independent electricity regulator who permitted a degree of vertical integration to encourage new entrants to compete against the generating duopoly and the Blair government imposed a temporary moratorium gas in response to its coal crisis.

However the energy and climate secretary is right on the money about the decades-long support for Britain’s civil nuclear power which a well informed economist in 1978 called ‘a series of disastrous misjudgments of the most fundamental kind.’ Electricity will remain a zombie sector until the government unscrambles these mixed up roles and precisely defines and allocates risk and responsibilities to those parties best able to manage them.

A miracle is a violation of the laws of nature; and as a firm and unalterable experience has established these laws, the proof against a miracle, from the very nature of the fact, is as entire as any argument from experience can possibly be imagined – David Hume, ‘An Enquiry Concerning Human Understanding’ (1748)

‘Let’s be honest with ourselves, we don’t have all the answers to decarbonisation today,’ Ms. Rudd said. Let’s be even more honest. The means of meeting carbon dioxide emissions cuts and keeping the lights on don’t exist. Energy policy is staring into the abyss of the unknown.

In an interview in The Atlantic, Bill Gates defined the innovation challenge as one that gives us energy that’s cheaper than today’s hydrocarbon energy, that has zero CO2 emissions, and that’s as reliable as today’s overall energy system. ‘And when you put all those requirements together, we need an energy miracle,’ the Microsoft founder said. Too often, ‘unleashing innovation’ trips off a speech-writer’s pen like a cork out of a champagne bottle. In the real world rather than the world of rhetoric, the government is betting on a miracle to keep the lights on and meet its self-imposed carbon dioxide budget.

Next week, I will be joining President Hollande and world leaders in Paris for the global climate conference. What a powerful rebuke to the terrorists it will be, when the world stands as one and shows that we will not be deterred from building a better future for our children – President Obama, 24th November, 2015

The energy and climate secretary’s speech was given twelve days before the start of the Paris climate conference. ‘Our most important task is providing a compelling example to the rest of the world of how to cut carbon while controlling costs,’ Ms. Rudd declared. ‘I inherited a department where policy costs on bills had spiralled.’ Very true. On climate change, there is a lot of sense in leading from behind, indeed it makes most sense being right at the back of the pack.

Mr. Darwall is the author of “The Age of Global Warming: A History” (Quartet, 2013).