The fiscal outlook in the UK may be gloomy, but there’s one beacon of light – we’re on the cusp of the greatest transformation since the Industrial Revolution as we rewire and rebuild our energy system to achieve clean power by 2030.The environmental benefits are clear, but the economic case for a homegrown energy system is even more compelling.
If we’d had a clean power system by 2022, the UK would have spent £20 billion less on gas imports during the energy crisis. The destination is clear: a Britain powered by its abundant renewable energy sources, not volatile imports. And in the form of the Government’s Clean Power Plan, we have a roadmap for getting there. A roadmap that will require around £40bn per year of private investment in clean electricity infrastructure.
This level of investment would bring far more than energy security. It would create skilled jobs, build new exportable industries, and provide a desperately needed boost to the economy.
It’s no easy task. We’re talking about post-war levels of infrastructure development and great feats of engineering: installing 110m high wind turbines hundreds of kilometres at sea, subsea cables bringing renewable power from the north of Scotland, and creating giant water batteries by blasting 12km tunnels through Highland hills.
This is big, bold, and radical. It’s deeply challenging but achievable with the right leadership and focus. The good news is we have the roadmap and are ready to accelerate. But there are some who think this would be a good moment not just to change the tyres but to dismantle and rebuild the car.
What do I mean by that? Radical proposals are being considered which would see the Government tear up the current energy market structure and introduce a “zonal” pricing system — essentially dividing the country into regions which would each have their own varying and unpredictable electricity prices based on local supply and demand.
The flawed logic is that this would incentivise developers to build closer to end users and encourage consumers to move closer to electricity sources. A decision on this is expected this summer. And make no doubt about it: imposing zonal pricing would be a political and economic disaster for three key reasons.
First, it would create a postcode lottery for bill payers. In countries where zonal pricing exists, some customers find themselves paying £200-£300 more for their energy depending on where they live—based on unpredictable factors over which they have no control. This creates clear equity issues in society. And recent analysis by LCP Delta has found that zonal pricing would lead to higher wholesale electricity prices in every part of Britain apart from the north of Scotland – but even there, system costs will simply be recovered elsewhere on the bill, and how this is done could negate any benefits as well as put investment in the region at risk.
Second, zonal pricing would not address the fundamental realities of energy infrastructure. The UK’s wind and solar resources are where they are — price signals won’t change that. Large-scale wind and solar farms can’t be built in urban centres. And the idea that the vague prospect of cheaper energy would incentivise factories to relocate near wind farms has been rubbished by the likes of Make UK and Steel UK – partly because there are more important factors that influence their location and partly because they hate the unpredictability it would bring. The fact was hammered home in a recent letter to the Government in which 16 trade bodies, including those representing manufacturing sectors and key trade unions called for zonal pricing to be ruled out.
In reality, by the time zonal pricing could be implemented, long-planned upgrades to the electricity grid will have been built that enable more renewables to be transported to consumers across the country – rendering the reforms pointless in any case.
Finally, and most critically, zonal pricing would increase the cost of achieving clean power by 2030 for everyone. What investors value most is certainty. The riskier an investment is perceived to be, the more expensive it is to finance. This is why energy infrastructure generators and key investors have warned the Government that zonal pricing would make investments more expensive.
This ultimately means higher costs for consumers – independent analysis from economists LCP Delta found that adding a single percentage point to the cost of capital would increase the cost of the energy transition by around £50bn. And the spectre of zonal pricing is already being factored into investment decisions. For example, we recently announced we couldn’t proceed with our plans to build an extension to our onshore wind farm at Bhlaraidh – and it was the risk premium we had to apply for zonal pricing that ultimately made the project uninvestable. Looking ahead, zonal pricing will drive up the cost of future projects ultimately paid for by consumers – Frontier Economics recently found that it could increase the cost of this summer’s offshore wind auction by up to £4bn.
We do need to evolve the current energy pricing system to ensure it’s fit for a clean power future. But major changes are possible without jeopardising our clean power goals. Regrettably, we’ve all seen in recent years how ideological economic thought experiments can trash investor confidence, with long-term consequences that ultimately hit consumers’ pockets.
What we need instead is an unwavering focus on unlocking low-cost private investment in low-carbon energy infrastructure.
The clean power prize is worth the effort: energy security, economic growth, new industries that revitalise overlooked parts of Britain, and global leadership on climate change. It’s all within reach. But only if policymakers resist the temptation to trade it all in for “what’s inside this box”.
Alistair Phillips-Davies is chief executive of SSE
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