The power to save Britain

How our island could be supplying Europe with green electricity. Plus Peter

It may not feel like it on a gusty grey day in Rhyl, but this country is blessed. Take a boat out into the choppy waters off the North Wales coast, and you can see why. Thirty bright white turbines spin continuously just five miles off the coast, producing enough electrical power to supply 40,000 homes with clean, green energy. The wind and waves seem limitless and powerful - and they are. If the UK had been more aggressive and far-sighted in developing renewable energy, we would already be exporting green electricity and wind turbines to Europe and further afield.

In renewable energy terms, we would be the Saudi Arabia of Europe. A full 40 per cent of the continent's wind blows across British shores, enough to meet all our energy needs and more. But instead of leading the world in renewable energy and at the same time cutting carbon emissions, the UK languishes close to the bottom of the European clean energy league. Just 2 per cent of our energy comes from renewable sources and the rest from dirty, climate-changing fossil fuels. This is the legacy of years of contradictory policies, conflicting priorities, ideological pig-headedness and government incompetence.

It's a story that shames Britain.

A good place to start is the government's Low Carbon Buildings Programme (LCBP). This was launched in 2006 to provide grants to householders wanting to instal renewable generation technologies - from solar panels to small hydro schemes - on their properties. Ministers acknowledge that micro-generation could play a big part in our clean energy future, and that turning homes into mini power stations is good for energy security, household income and the environment. But what actually happened? Instead of kick-starting a whole new market sector, the government starved it of funds. A measly £12.7m was allocated, with a monthly cap. On the first day of each month all the available grants were snapped up within hours.

This stop-start approach led to frustrated householders and cash-strapped solar installation companies, many of which began to go bust. The number of grants given for solar hot water systems fell by half last year, and the number for micro wind turbines by two-thirds. For ground-source heat pumps, while 100 grants were made in the last three months of 2006, the equivalent number for 2007 was zero. For electricity, we managed to put only 270 solar panels on British roofs last year, while Germany installed 130,000.

Gordon Brown, first as chancellor, and now as Prime Minister, has successfully ensured that it makes no financial sense whatsoever for householders to invest in generating their own energy renewably. If you put up a solar photovoltaic panel in this country, you do it for altruistic reasons only: at present, you are guaranteed to lose money hand over fist.

Germany's renewables sector has rocketed, thanks to a system that guarantees long-term paybacks at above-market rates for cleanly generated power. This is called the "feed-in tariff", which has also successfully catapulted Spain and Portugal to the top of the European clean energy league. Portugal gets 39 per cent of its electricity from renewables and is aiming for 60 per cent by 2020. In stark contrast, the UK government continues to rule out feed-in tariffs, insisting instead on retaining its outdated Renewables Obligation system, a support mechanism which is so complicated and cumbersome that only the biggest players can make any money from it (or, indeed, even understand it).

The RO system reveals another classic new Labour problem: an obsession with the market. Instead of simply guaranteeing a good return for solar or wind electricity over a long enough time period to make this an attractive investment, the government insists on making the Renewable Obligation Certificates tradable. If a company doesn't meet its obligation to generate power renewably, it must buy certificates from another company that has produced a surplus. The result is long-term price uncertainty, which makes investment much more costly, due to the "risk premium" that must be added to any lending. The ROC system has been fiddled with so many times that the British Wind Energy Association (BWEA) now opposes a feed-in tariff system, on the grounds that yet more policy uncertainty might scare off potential investors for good.

Lost business

This catalogue of failure has not only been bad for the climate, it has been bad for business. Britain might once have led the world in wind turbine development. But with no domestic market, production moved elsewhere, and today most turbines installed in this country are imported from Denmark. The leader in solar power is not Britain but Germany, which has pioneered a lucrative export industry in solar photovoltaic cells. In China, too, solar manufacturing is big business: the country's second-richest man leads a solar energy company. This is an energy sector which saw growth last year of roughly 40 per cent, and has attracted tens of billions in venture capital. None of that came to Britain. Instead of creating a brand new industry and thousands of jobs, British-based renewables companies have been going out of business.

Wind should already be our biggest single power source. The BWEA estimates that wind could generate 27 per cent of our electricity by 2020, which, combined with other renewables, could easily meet our EU-assigned target of 15 per cent renewable energy by 2020. Instead, wind accounts for just 1.5 per cent of UK electricity generation today (the equivalent figure in far less windy Denmark is 20 per cent, for Spain 8 per cent and Germany 5 per cent). That 1.5 per cent could be ramped up very quickly if the planning system worked in favour of renewables. According to the BWEA, 220 windpower projects are currently stuck in planning. If all received immediate consent, they could generate 9.3 gigawatts of electricity, enough for an estimated 5.25 million households. If the 39 projects that were refused planning permission last year had instead been allowed it, they could have provided power for 750,000 households, and prevented the emission of three million tonnes of CO2. (Anti-wind campaigners need to recognise their moral liability for these climate-changing emissions.)

While 39 projects were refused planning permission, just 26 projects went ahead. This year, we are level-pegging: seven wind applications have been approved and six refused. It can now take ten years for a windfarm project to get approved and built, and another five for it to get a grid connection (unlike in other countries, renewable generators here have to pay for their own grid connections). This does not look like a country on the fast track to a clean energy future. Indeed, power companies such as E.ON are pro posing to invest billions in hugely polluting coal power plants instead.

The government has proposed to reform the planning system to make it easier for windfarms to get the go-ahead. Environmentalists and conservationists are opposed to the reform, however, for the good reason that it would also make it easier for new motorways, power stations and airports to gain approval, and stifle local democracy in the process.

A greener government might have focused on reforming the planning system for renewable energy projects, gaining support from greens and electricity generators alike. Instead, in its enthusiasm for aviation and nuclear power, the government has bundled windfarms into a planning policy package that will be opposed by almost all. A missed opportunity.

There is some good news. The 1000MW London Array - which will generate enough power from wind for a quarter of London's households - has been given the go-ahead. Several other major projects are under way, and this year the UK will overtake Denmark as the largest offshore generator in the world. The UK also still leads in marine renewables (wave and tidal stream power). With 30 marine technology developers headquartered here, compared to only 15 in the rest of Europe, the UK is able to put its offshore operational skills learned from North Sea oil - now in long-term decline - to good use. At the end of last month the world's largest conference on wave and tidal stream energy, Marine 08, was held in Edinburgh. Tidal power would address the intermittency question: what to do when the wind doesn't blow and the sun doesn't shine. Tidal power is predictable. Wave power is also more dependable. The more sources of energy we can call on, the less vulnerable we will be to losing power in any one sector.

Yet in marine renewables, too, the government has risked Britain losing its competitive edge. The world's first commercial-scale wave-generating array, while built by a UK-based company, is being launched off the Portuguese, not the British, coast. And, mirroring the disaster of the Low Carbon Buildings Programme, the Marine Renewables Deployment Fund - supposed to support the fledgling sector with capital grants and other financial aid - has a tiny budget and a cap per project of £9m, far too little for any British design to make it past the prototype stage into commercial production. Once again, we are wasting a historic advantage.

With the right policy levers pulled, we could in the not-too-distant future be generating 20 per cent of all our electricity out at sea using wave and tidal power, and far more from onshore and offshore wind. We could lead the world in a new manufacturing sector and generate thousands of new jobs. We could have a zero-carbon electricity grid as early as 2030. We could also lead the world in reducing greenhouse-gas emissions.

But, for this to happen, the government will need to admit that its policies have been a cala mitous failure and put clean energy at the top of its long-term agenda, before it is too late.

Mark Lynas has is an environmental activist and a climate change specialist. His books on the subject include High Tide: News from a warming world and Six Degree: Our future on a hotter planet.

This article first appeared in the 10 March 2008 issue of the New Statesman, How Hillary did it

MILES COLE
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The new Brexit economics

George Osborne’s austerity plan – now abandoned by the Tories – was the most costly macroeconomic policy mistake since the 1930s.

George Osborne is no longer chancellor, sacked by the post-Brexit Prime Minister, Theresa May. Philip Hammond, the new Chancellor, has yet to announce detailed plans but he has indicated that the real economy rather than the deficit is his priority. The senior Conservatives Sajid Javid and Stephen Crabb have advocated substantial increases in public-sector infrastructure investment, noting how cheap it is for the government to borrow. The argument that Osborne and the Conservatives had been making since 2010 – that the priority for macroeconomic policy had to be to reduce the government’s budget deficit – seems to have been brushed aside.

Is there a good economic reason why Brexit in particular should require abandoning austerity economics? I would argue that the Tory obsession with the budget deficit has had very little to do with economics for the past four or five years. Instead, it has been a political ruse with two intentions: to help win elections and to reduce the size of the state. That Britain’s macroeconomic policy was dictated by politics rather than economics was a precursor for the Brexit vote. However, austerity had already begun to reach its political sell-by date, and Brexit marks its end.

To understand why austerity today is opposed by nearly all economists, and to grasp the partial nature of any Conservative rethink, it is important to know why it began and how it evolved. By 2010 the biggest recession since the Second World War had led to rapid increases in government budget deficits around the world. It is inevitable that deficits (the difference between government spending and tax receipts) increase in a recession, because taxes fall as incomes fall, but government spending rises further because benefit payments increase with rising unemployment. We experienced record deficits in 2010 simply because the recession was unusually severe.

In 2009 governments had raised spending and cut taxes in an effort to moderate the recession. This was done because the macroeconomic stabilisation tool of choice, nominal short-term interest rates, had become impotent once these rates hit their lower bound near zero. Keynes described the same situation in the 1930s as a liquidity trap, but most economists today use a more straightforward description: the problem of the zero lower bound (ZLB). Cutting rates below this lower bound might not stimulate demand because people could avoid them by holding cash. The textbook response to the problem is to use fiscal policy to stimulate the economy, which involves raising spending and cutting taxes. Most studies suggest that the recession would have been even worse without this expansionary fiscal policy in 2009.

Fiscal stimulus changed to fiscal contraction, more popularly known as austerity, in most of the major economies in 2010, but the reasons for this change varied from country to country. George Osborne used three different arguments to justify substantial spending cuts and tax increases before and after the coalition government was formed. The first was that unconventional monetary policy (quantitative easing, or QE) could replace the role of lower interest rates in stimulating the economy. As QE was completely untested, this was wishful thinking: the Bank of England was bound to act cautiously, because it had no idea what impact QE would have. The second was that a fiscal policy contraction would in fact expand the economy because it would inspire consumer and business confidence. This idea, disputed by most economists at the time, has now lost all credibility.

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The third reason for trying to cut the deficit was that the financial markets would not buy government debt without it. At first, this rationale seemed to be confirmed by events as the eurozone crisis developed, and so it became the main justification for the policy. However, by 2012 it was becoming clear to many economists that the debt crisis in Ireland, Portugal and Spain was peculiar to the eurozone, and in particular to the failure of the European Central Bank (ECB) to act as a lender of last resort, buying government debt when the market failed to.

In September 2012 the ECB changed its policy and the eurozone crisis beyond Greece came to an end. This was the main reason why renewed problems in Greece last year did not lead to any contagion in the markets. Yet it is not something that the ECB will admit, because it places responsibility for the crisis at its door.

By 2012 two other things had also become clear to economists. First, governments outside the eurozone were having no problems selling their debt, as interest rates on this reached record lows. There was an obvious reason why this should be so: with central banks buying large quantities of government debt as a result of QE, there was absolutely no chance that governments would default. Nor have I ever seen any evidence that there was any likelihood of a UK debt funding crisis in 2010, beyond the irrelevant warnings of those “close to the markets”. Second, the austerity policy had done considerable harm. In macroeconomic terms the recovery from recession had been derailed. With the help of analysis from the Office for Budget Responsibility, I calculated that the GDP lost as a result of austerity implied an average cost for each UK household of at least £4,000.

Following these events, the number of academic economists who supported austerity became very small (they had always been a minority). How much of the UK deficit was cyclical or structural was irrelevant: at the ZLB, fiscal policy should stimulate, and the deficit should be dealt with once the recession was over.

Yet you would not know this from the public debate. Osborne continued to insist that deficit reduction be a priority, and his belief seemed to have become hard-wired into nearly all media discussion. So perverse was this for standard macroeconomics that I christened it “mediamacro”: the reduction of macroeconomics to the logic of household finance. Even parts of the Labour Party seemed to be succumbing to a mediamacro view, until the fiscal credibility rule introduced in March by the shadow chancellor, John McDonnell. (This included an explicit knockout from the deficit target if interest rates hit the ZLB, allowing fiscal policy to focus on recovering from recession.)

It is obvious why a focus on the deficit was politically attractive for Osborne. After 2010 the coalition government adopted the mantra that the deficit had been caused by the previous Labour government’s profligacy, even though it was almost entirely a consequence of the recession. The Tories were “clearing up the mess Labour left”, and so austerity could be blamed on their predecessors. Labour foolishly decided not to challenge this myth, and so it became what could be termed a “politicised truth”. It allowed the media to say that Osborne was more competent at running the economy than his predecessors. Much of the public, hearing only mediamacro, agreed.

An obsession with cutting the deficit was attractive to the Tories, as it helped them to appear competent. It also enabled them to achieve their ideological goal of shrinking the state. I have described this elsewhere as “deficit deceit”: using manufactured fear about the deficit to achieve otherwise unpopular reductions in public spending.

The UK recovery from the 2008/2009 recession was the weakest on record. Although employment showed strong growth from 2013, this may have owed much to an unprecedented decline in real wages and stagnant productivity growth. By the main metrics by which economists judge the success of an economy, the period of the coalition government looked very poor. Many economists tried to point this out during the 2015 election but they were largely ignored. When a survey of macroeconomists showed that most thought austerity had been harmful, the broadcast media found letters from business leaders supporting the Conservative position more newsworthy.

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In my view, mediamacro and its focus on the deficit played an important role in winning the Conservatives the 2015 general election. I believe Osborne thought so, too, and so he ­decided to try to repeat his success. Although the level of government debt was close to being stabilised, he decided to embark on a further period of fiscal consolidation so that he could achieve a budget surplus.

Osborne’s austerity plans after 2015 were different from what happened in 2010 for a number of reasons. First, while 2010 austerity also occurred in the US and the eurozone, 2015 austerity was largely a UK affair. Second, by 2015 the Bank of England had decided that interest rates could go lower than their current level if need be. We are therefore no longer at the ZLB and, in theory, the impact of fiscal consolidation on demand could be offset by reducing interest rates, as long as no adverse shocks hit the economy. The argument against fiscal consolidation was rather that it increased the vulnerability of the economy if a negative shock occurred. As we have seen, Brexit is just this kind of shock.

In this respect, abandoning Osborne’s surplus target makes sense. However, there were many other strong arguments against going for surplus. The strongest of these was the case for additional public-sector investment at a time when interest rates were extremely low. Osborne loved appearing in the media wearing a hard hat and talked the talk on investment, but in reality his fiscal plans involved a steadily decreasing share of public investment in GDP. Labour’s fiscal rules, like those of the coalition government, have targeted the deficit excluding public investment, precisely so that investment could increase when the circumstances were right. In 2015 the circumstances were as right as they can be. The Organisation for Economic Co-operation and Development, the International Monetary Fund and pretty well every economist agreed.

Brexit only reinforces this argument. Yet Brexit will also almost certainly worsen the deficit. This is why the recent acceptance by the Tories that public-sector investment should rise is significant. They may have ­decided that they have got all they could hope to achieve from deficit deceit, and that now is the time to focus on the real needs of the economy, given the short- and medium-term drag on growth caused by Brexit.

It is also worth noting that although the Conservatives have, in effect, disowned Osborne’s 2015 austerity, they still insist their 2010 policy was correct. This partial change of heart is little comfort to those of us who have been arguing against austerity for the past six years. In 2015 the Conservatives persuaded voters that electing Ed Miliband as prime minister and Ed Balls as chancellor was taking a big risk with the economy. What it would have meant, in fact, is that we would already be getting the public investment the Conservatives are now calling for, and we would have avoided both the uncertainty before the EU referendum and Brexit itself.

Many economists before the 2015 election said the same thing, but they made no impact on mediamacro. The number of economists who supported Osborne’s new fiscal charter was vanishingly small but it seemed to matter not one bit. This suggests that if a leading political party wants to ignore mainstream economics and academic economists in favour of simplistic ideas, it can get away with doing so.

As I wrote in March, the failure of debate made me very concerned about the outcome of the EU referendum. Economists were as united as they ever are that Brexit would involve significant economic costs, and the scale of these costs is probably greater than the average loss due to austerity, simply because they are repeated year after year. Yet our warnings were easily deflected with the slogan “Project Fear”, borrowed from the SNP’s nickname for the No campaign in the 2014 Scottish referendum.

It remains unclear whether economists’ warnings were ignored because they were never heard fully or because they were not trusted, but in either case economics as a profession needs to think seriously about what it can do to make itself more relevant. We do not want economics in the UK to change from being called the dismal science to becoming the “I told you so” science.

Some things will not change following the Brexit vote. Mediamacro will go on obsessing about the deficit, and the Conservatives will go on wanting to cut many parts of government expenditure so that they can cut taxes. But the signs are that deficit deceit, creating an imperative that budget deficits must be cut as a pretext for reducing the size of the state, has come to an end in the UK. It will go down in history as probably the most costly macroeconomic policy mistake since the 1930s, causing a great deal of misery to many people’s lives.

Simon Wren-Lewis is a professor of economic policy at the Blavatnik School of Government, University of Oxford. He blogs at: mainlymacro.blogspot.com

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt