United Kingdoms Future Energy Policy.
The direction the UK takes to ensure its future energy needs is making headlines at the minute. Chris Huhne, Secretary of State for Energy and Climate Change, a Liberal Democrat, is getting a lot of criticism from the right wing press and Conservative politicians. No more so than Roger Helmer in his blog who suggests Huhne’s policies will ‘close down the entire British economy overnight’.
Mr Helmer also claims that economists point out ‘the policy is doomed to fail’, and ‘It will drive up electricity prices, force millions more households into fuel poverty, and undermine the competitiveness of European economies, and especially of the British economy’.
With so much at stake I asked twice on his blog who these economists were and perversely the only name he gave me was Lord Stern, apparently as the only economist on the planet that agreed with Huhne.
But this story has escalated in the last few days with a leaked letter to PM Cameron from his senior energy adviser, Ben Moxham, and is being shamefully misrepresented in the Telegraph with claims that the letter poured scorn on Huhne’s policies and these policies would add £300 to household energy bills. I say misrepresented because the actual letter has also been made available on the Telegraph web site and it is clear that the Telegraph has spun this story to fit it’s anti-green bias.
Important points in what Ben Moxham’s letter actually says;
This letter is a brief report of Moxham’s analysis of DECC (Department of Energy and Climate Change) assumptions.
It determines that ‘Policy costs currently make up around 10% of the average household energy bill’ and this proportion will rise. But it makes no determination if this rise will actually lead to higher costs for the consumer because as well as relying on overall policy, it all depends on the future wholesale price of gas. The letter said;
“Turning specifically to gas, if one were to assume low gas prices in 2020, the cost of policies to encourage more nuclear and renewables would be high – since it would turn out cheaper not to pursue these policies and to instead to be more reliant on gas. On the other hand, if one were to assume very high gas prices in 2020, being more reliant on nuclear and renewables could conceivably make consumers better off compared to the alternative of greater reliance on gas.”
There are two things to understand about the above paragraph;
- It is not talking solely about ‘green policies’ as the Telegraph claims. It is also talking about nuclear. So to claim that any resultant price rise is because of green policies when most environmentalists would baulk at the thought of nuclear is misrepresentation.
- We need to know what price of future gas DECC has set. If it is too low then it will look as if any policy change will cost more than doing nothing and if it is too high it will be too optimistic about costs. Moxham gives us the answer; ‘DECC's analysis is based on a mid-case gas price counterfactual, assuming a gas price broadly consistent with today's forward prices’
So the analysis, on this point, seems to be accepting that Huhne’s department has made realistic and reasonable assumptions about ‘a significant factor behind the household energy price’.
The letter also states ‘Our policies would have a relatively small impact on household gas prices
Our policies would increase household electricity prices by 25% in 2015 and 30% in 2020 compared to what they would have been in the absence of policies.’
So it is clear that the price increases are only referring to electricity prices because there is ‘a relatively small impact on household gas prices’. The letter also helpfully gives us a break down of ‘the average household energy bill’ which is ‘£1,059, made up of £591 spent on gas and £468 spent on electricity’. So simple schoolboy arithmetic can calculate a 30% rise in electricity (for 2020).
30% of £468 is £140.40. Where does the Telegraph get an increase of £300 from? Well it looks as if they cant comprehend the letter and used the whole £1,059 bill. What are the chances of them ever admitting to this schoolboy error and correcting the value? Then again ‘more than £300 a year as a result of the Coalition’s green policies’ sounds a lot better than admitting to half that for an energy policy that includes nuclear.
But £140 is still a significant amount to add to household energy costs (nearly £12 a month), so what does DECC and Moxham have to say about that? Here we find the only valid criticism of one by the other. This increase is supposed to be offset by households adopting energy efficiency measures.
“The impact of our policies on household electricity bills (as opposed to prices) would be lower due to the effect of other policies, notably energy efficiency measures, in lowering electricity consumption: i) According to DECC, the effect of this lowered consumption on household electricity bills would outweigh the impact of policies in raising prices, leading to electricity bills that are, net, 1% lower in 2015 and 4% lower in 2020 than they would be in the absence of policies”.
So even with the increase on electricity prices DECC claims an over all decrease of 4% in household bills due to the effect of overall policy. Moxham is not so sure because he is uncertain that households will take up proposed energy efficiency measures without subsidy. Not exactly the headline making stuff that the Telegraph would like but it does suggest that some policies may need tweaked to make energy efficiency more attractive during the next 8 years - hardly undoable or costly in real terms.
Place your bets.
This leaked letter also drew the attention of Damian Carrigton over at the Guardian. He noted how wholesale energy is the most significant cost in consumer energy bills and suggested it was time to ‘place your bets on fossil fuels versus renewable energy’.
I’d bet the break even price point between adopting these nuclear/green policies and doing nothing will be similar to that suggested by DECC and Moxham or perhaps a little more favourable to these policies. In any case, if it isn’t by 2020 it will be shortly after and as I said on Helmer’s Blog; “We don’t want to be installing the most economic plant then, playing catch up and importing the technology and expertise. We should be doing it now.”
In fact for my penny’s worth I can repeat in part what I said to a poster on Helmers blog;
"We need an energy policy fit for the future and not having a wide range of alternatives wont fit that bill. It doesn’t take an economist to realise that other than short term market variability the fuels we use for most generation are as cheap as they are ever going to be. No one with any wit ever expects to see petrol at £1 a litre or less ever again. Have you considered that these are not only going to get more expensive but that we do not produce enough of them for our own needs? How sensible is it to rely on foreign imports let alone the fact all that money is going out of our own countries pockets?
But alternatives will only ever get cheaper for the foreseeable future. Price parity with convention generation will happen within a generation. We don’t want to be installing the most economic plant then, playing catch up and importing the technology and expertise. We should be doing it now."
"But we also really need big capital projects like the Severn Barrier. I studied the practicalities of this at Uni more years ago than I care to remember and then it would have reliably supplied over 10% of the whole countries energy needs. The problem is that to build it takes more than one government term, and successive governments have mis-handled energy policy and only considered what they could do to get to the next election. But such big capital projects are exactly what this country needs for both energy and employment. "