19 November 2018

The busted flush of the UK’s energy and industrial strategies

By Rupert Darwall

For years, bien pensants were saying that what Britain really needs is an energy strategy. Now we have not only an energy strategy but an industrial strategy as well, and we can see it’s a busted flush.

The recent decision by Toshiba to liquidate its interest in the Moorside nuclear project shows that having governments, rather than markets, picking winners is a losing strategy. Moorside was to have met 7 per cent of Britain’s electricity needs. It is now gone – and has blown a huge hole in the Government’s plan to build a string of nuclear power stations.

The government take-over of the energy market is an inevitable result of massive subsidies for wind and solar. Together with a battery of green levies, they inflicted large losses on gas and coal-fired power stations. But so-called despatchable capacity is needed to keep the lights on. The Government therefore decided to become the “central buyer” of new capacity, hoping that would be enough for private sector investment to pour into new gas-fired power stations. That did not happen and now the nukes are vanishing over the horizon.

The big winners are not hard to miss. Last year, the gas and coal-fired power stations owned by the Big Six energy companies achieved an average selling price of £59.31 per MWh, racking up losses of £1.76 for each MWh they generated. By contrast, their green investments generated eye-watering returns. Thanks to price supports, renewable obligations and the like, electricity from wind and solar had an average price of £115.40 per MWh, a 95 per cent premium and an average profit of £54.57 per MWh.

This is quite simply green crony capitalism. In any other sector, near 50 per cent profit margins would have politicians and the media baying for blood. But what amounts to legalised theft – short of disconnecting from the grid, electricity consumers have no choice but to fund these egregious profits – is condoned by politicians because the profits are being made in order to save the planet.

Letting green energy investors line their pockets means higher energy costs for households and so concerned was the Coalition government about the impact of higher energy prices on energy poverty that it changed the measurement of fuel poverty to make it less sensitive to higher prices. It also means higher energy costs for business, damaging their ability to compete and harming future investment – all the bad things we’re told will happen to Britain’s manufacturing base if we do not get Brexit right.

British businesses already pay more for their energy than all their competitors in the EU. The more they use, the higher the price differential compared to their EU competitors. For medium energy users in 2016, energy costs were 56.7 per cent higher than the EU average. For intensive energy users, they are double the EU average.

The energy cost penalty British business is forced to pay comes straight off their bottom line. For a medium energy consuming business with an 8 per cent profit margin, the British energy penalty would represent 20 per cent of their profits. For larger ones, the 85.7 per cent penalty very nearly wipes out their profit.

Cheap, abundant energy powered the Industrial Revolution. Manufacturing involves altering, transforming and re-arranging matter to make useful things. It is intrinsically energy-intensive. Steel-making, chemicals, paper, ceramics are all energy demanding sectors, collectively employing over 200,000 people. Uncompetitive energy costs force them into structural decline and push investment overseas. In short, the Government’s energy strategy amounts to a de-industrialisation strategy.

At the same time, the Government has an industrial strategy, a modern one, no less. How can it square the circle and undo the damage to Britain’s manufacturers from its energy policy? It does not even try. The only modern thing about the industrial strategy is that it is a blueprint for a post-industrial economy. For the most part, it is re-heated 1960s white heat. There are few things more stale in British politics than calls for more R&D, science and technology as silver bullets for the economy. Commenting on a 1981 paper advocating a modern industrial strategy, the distinguished economist David Henderson, who died on September 30, observed:

“One would not gather from what is said here is that industrial policies, science policy, and the volume and direction of R&D support had been virtually continuous subjects of concern to British governments over the past thirty years or so; nor is there any consideration of the conscious efforts made to accelerate economic growth through the medium of government support for science and technology. We hear nothing about the ‘white-hot technical revolution,’ nor the spirit and programmes that were associated with the new-forgotten MinTech.”

Henderson went on to criticise what he called the “soap opera” approach to the choice of industries to support. Then, as now, the automotive and aerospace sectors are perennial favourites which today serve as sob stories for Brexit disrupting supply chains to justify the Prime Minister’s Chequers Plan for frictionless trade.

Industrial strategies invariably involve a lot of talk and lots of meetings. True to form, the Government is reviving the sectoral working parties (SWPs) of the Wilson government’s 1975 Industrial Strategy White Paper that led to the establishment of 40 SWPs covering over two-thirds of manufacturing industry. In words that Greg Clark could have used to describe his modern industrial strategy, the 1975 White Paper called its approach as less of a strategy and more of a methodology. How very modern.

The Government’s industrial strategy partly fills the vacuum left by the hollowing out of economic policy from the Treasury. Monetary policy has been shunted off to the Bank of England and micro-economic policy farmed out to the department for Business, Energy and Industrial Strategy (BEIS), leaving the Treasury to obsess about Brexit and devising new taxes on things like non-recycled plastic.

In addition to reviving Harold Wilson-era SWPs, there is an Industrial Strategy Council to hold BEIS accountable for its delivery. It is chaired by Andy Haldane, one of Britain’s most thoughtful and thought-provoking economists. But there is a problem: Haldane’s full time job is the Bank of England’s chief economist and a member of the Monetary Policy Committee. As such, he is parti pris.

In a speech in June, Haldane addresses Britain’s productivity puzzle. The puzzle is misspecified. It is not the level of Britain’s labour productivity that is puzzling. When the employment rate is graphed against output per hour, in 2014, Britain’s performance was slightly ahead of the G7 average. The real puzzle is why labour productivity, unlike after the 1990-92 recession, failed to recover and grow strongly after the 2008 banking crisis.

A critical factor is the potential role of post-crisis monetary policy in Britain’s poor productivity. There is, as former MPC member Andrew Sentance and Andrew Lilico argue, good reason to think that monetary policy has been a significant factor. Unsurprisingly, the possible role of post-crisis monetary policy in explaining the productivity puzzle is not mentioned by Haldane in his June speech.

Nonetheless, it is hard to see how a capitalist economy can function efficiently when the central bank is systematically distorting the price of capital and forcing real interest rates into negative territory indefinitely.

An energy strategy that is a de-industrialisation strategy and an industrial strategy for a post-industrial society combined with a monetary policy that saps the vitality out of capitalism – it all amounts to a serious abdication of the core responsibility of any government: it must have an economic policy. One thing can be said about Labour and John McDonnell. They have an economic policy. Irrespective of Brexit, Britain will flounder unless and until the Government fills this void at its heart.

Rupert Darwall is the author of Green Tyranny: Exposing the totalitarian roots of the Climate Industrial Complex.