Dividing Lines: Energy bills

Keeping the lights on.

New Statesman

One thing is certain in any discussion of energy policy: bills are going up, regardless of how Britain generates electricity – coal, gas, nuclear, wind, wave, solar . . . Prices rise when demand outstrips supply and the UK needs more power than it can generate for itself. That won’t be changing soon.

Define soon.
Our infrastructure is ageing and pollutes at levels that are incompatible with European laws. About a fifth of our current generating capacity – coal-fired and nuclear power stations – will be lost over the next five to ten years. By 2020 we will depend on gas for roughly 80 per cent of all our power.

Volatile gas prices have the biggest impact on our bills. At the same time, long-term dependence on gas-exporting nations poses a strategic challenge. We don’t want Vladimir Putin deciding whether our lights stay on.

We have gas. What about this “fracking” everyone talks about?
Fracking involves using explosives and water pumps to unlock gas trapped in underground sedimentary rock (shale). It has worked wonders in the United States and George Osborne is keen. The Treasury’s strategy for plugging energy shortfalls has been summed up as a “dash for gas”.

Some Tories love that idea because it sounds like an alternative to wind turbines, which they despise. But geologists question whether conditions are right for fracking in the UK. No shale gas has been extracted profitably yet anywhere in Europe. The best that can be said is that it might one day become part of the energy supply mix.

Along with all the green hippie stuff?
Renewable energy sources are big business. In 2011 the environmental sector was worth £122bn in Britain. It employs tens of thousands of people and has been growing at 2 per cent a year for the past five years. That progress, manufacturers say, is threatened by a lack of investor confidence that the government is committed to the sector.

They want money, right?
We’ll come to that. They want the government to extend its targets for limiting the carbon emissions from power generation to 2030. (The current regime expires in 2020.) Setting those goals guarantees a future market for renewable technology.

The coalition’s Energy Bill, now on its way through parliament, defers a decision on carbon targets until after the next election. Too late, say investors and environmentalists. A cross-party amendment inserting a 2030 target has been tabled by Barry Gardiner (Lab) and Tim Yeo (Con). Labour will support the move; most Tories will oppose it.

What about the Lib Dems? Aren’t they supposed to like the environment?
Ed Davey, the Lib Dem who is the Secretary of State for Energy and Climate Change, argues that carbon emissions can still be cut and that deferring a headline 2030 target was a necessary sacrifice to the Tories in order to get other eco-friendly measures into the Energy Bill. Davey’s big “win” is a system for supporting investment in low-carbon capacity through a government-backed agency which, in effect, insures the power generators against price volatility.

Sounds complicated.
Fiendishly so. It involves “contracts for difference” that set out a fixed “strike price”. If the market price falls below that level, the generators get a top-up; if prices soar, then the generators pay something back. It’s a way of underwriting the risk for new entrants into the generating game, which is essential because start-up costs are so high and the market is so uncertain. The critical questions are who takes on the risk, who ends up paying and at what level. The “strike prices” for various sectors are yet to be decided.

The problem is that different types of energy have different requirements. Wind, solar, tidal – the greenest renewables – cost a lot to instal, don’t deliver vast amounts of power as individual projects, but are very cheap to maintain once they get going (hence, renewable). It is nuclear power that delivers the highest wattage but it is costly to run.

The French energy group EDF has plans to build a nuclear plant at Hinkley Point in Somerset. It would provide 7 per cent of the UK’s electricity, but the project is stalled pending agreement on the strike price. EDF wants a nice, high level but the coalition doesn’t want to be seen doling out special favours to (French-owned) nuclear power.

The Tories are generally allergic to state handouts; the Lib Dems had a 2010 manifesto pledge opposing new atomic power, which they watered down to an aversion to public subsidy for new nuclear stations.

Eh? Isn’t the “strike price” a public subsidy?
A kind of subsidy, yes, but technically not a public one, because the money comes from a levy on consumer bills.

So the answer to high energy bills involves raising bills? Classy.
Whatever happens, customers will pay towards the cost of transition to low-carbon energy. Ideally, the system would allow the greenest companies to offer the best rates so customers can punish polluters by switching providers. At the moment, hardly anyone switches supplier and the market is failing.

All this assumes that climate change is real. There are sceptics . . .
In Ukip and on the Tory back benches, maybe. People who understand science are looking for solutions, not denying the problem.

Rafael Behr is the political editor of the New Statesman