Keir Starmer famously won power this summer by pursuing a ‘Ming vase’ strategy – say as little as possible, and let the incumbent government lose the election. But one notable exception was Ed Miliband, and his pledge to decarbonise the power grid by 2030, five years ahead of the previous government’s target of 2035.
Never mind that a good many in the energy industry thought this would be very difficult at best. Or that his (in)famous claim that this would lead to £300 off bills did not stack up, as Centre for Policy Studies director Robert Colvile pointed out at the time. Miliband was undeterred – and so entered government with 2030 as one of Labour’s five Missions for Britain.
Now it’s important to say upfront that decarbonisation is vital, both in the power sector and the wider economy. But there are multiple ways to go about this – and if done badly it could have profound consequences for our economy, not to mention making our wider Net Zero targets more difficult to meet.
Shortly after taking power, Miliband commissioned a report from the National Energy System Operator (NESO) on how to achieve the 2030 target. NESO is a new public body that runs the electricity system on a day-to-day basis, and is set up to be operationally independent of government.
Earlier this month, NESO delivered its report – and Miliband duly claimed victory. He argued that ‘independent, expert analysis’ had provided ‘conclusive proof that clean power by 2030 is not only achievable but also desirable’.
Does the report actually back up these grandiose claims? NESO says that the target is ‘a huge challenge’ but ‘achievable’, while ‘several elements must deliver at the limit of what is feasible’. And indeed the specifics are daunting. Meeting the target would see demand flexibility increased by four to five times from today’s levels, would mean expanding the transmission network by twice as much in the next five years as was built in total over the last decade, and it relies on delivering all of this on time. The list goes on.
So reading between the lines, NESO is saying – yes this is theoretically possible, if absolutely everything goes right (never a good bet when it comes to government policies). And that’s only the case if ‘clean’ is defined as 95% clean, rather than a more stringent definition such as 98% (the Climate Change Committee’s metric).
But beyond the ‘how’, the report also attempts to take on the ‘why’, and provide some justification for the sprint to 2030. In addition to the usual nods to green growth, green jobs and the environment, the crux of the argument is that hitting 2030 will ‘cut the link between electricity bills and volatile international gas prices, without increasing costs to consumers’.
This is where the report gets a bit over its skis, as a new briefing from the Centre for Policy Studies shows. Because the fine print reveals that justifying this claim relies on some rather aggressive assumptions. The most glaring example is on gas prices, where NESO has assumed that prices will remain high (around October levels) at 101p / therm in 2030. But that’s substantially higher than not only other independent forecasters, but Miliband’s own department, which a few months ago predicted prices of 72p / therm.
And indeed, given the substantial wave of LNG export capacity additions on the horizon (which could be further boosted by the election of Donald Trump), the International Energy Agency believes an ‘LNG glut’ is coming, which will depress prices. As do other independent forecasters – see the below chart.
The same goes for the sensitivities NESO runs. The high case for 2030 is 290p, miles above the high case produced by the Department for Energy Security and Net Zero (DESNZ), which sits at 114p. Now that’s not crazy relative to prices seen at the height of the energy crisis, but then again that was a short-term shock, not a generally higher price environment. But what about the low case? At 72p, this is more reassuring. But as shown above, this quite literally takes the DESNZ central case! And the department’s own low case of 42p sails far below, untouched.
So are the NESO’s assumptions wildly implausible? No. But they do look skewed upwards relative to what others are projecting.
Another important assumption is the cost of carbon. This is driven both by our Emissions Trading Scheme (ETS), where allowances currently trade for £36, and our Carbon Price Support (CPS) which adds another £18 on top for gas power stations. Where does NESO think we’ll be in 2030? At £147 / tonne – 2.7 times today’s level! And this too sits substantially above the DESNZ estimate of £87, even if the Government retained the CPS on top.
Now of course the Government has substantial control over carbon prices (unlike gas prices) – it’s a cost we impose on ourselves after all. And while NESO points out that such a high price is a modelling assumption rather than a policy recommendation, it would represent a remarkable ramp up in our carbon price in around five years, with far-reaching implications for industries beyond power that also are subject to the ETS.
Why does all this matter? Because by making gas power generation so expensive (via high gas and carbon prices), all that new wind power we’re going to be building looks to be good value. And thus using those assumptions makes Miliband’s 2030 system appear cheaper than it otherwise might.
Indeed, the report asserts that costs to consumers will not increase by virtue of the 2030 plan – but this assertion is ultimately underpinned by these aggressive price assumptions. In an annex to the main report, the authors mention that if using the DESNZ central figures for gas and carbon, costs would in fact increase compared to today’s system. And imagine what the numbers would look like if they used an actual low gas price sensitivity!
None of this is meant to downplay the importance of decarbonisation, both in our grid and across the wider economy. But by using such aggressive assumptions to underpin the modelling, the report raises as many questions as it answers about the merits of Labour’s 2030 plan.
The cost of electricity is one of the most important inputs into our wider economy, driving the fortunes of households and businesses up and down the country. If we’re serious about growth (and for that matter, decarbonisation), cheap electricity is key. So if Labour’s sprint for 2030 ends up pushing up costs for consumers, we’ll all be paying the price.
Read the full report, ‘The Great Grid Gamble’, here.
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