Five steps to give consumers cheaper and greener energy
This Op-Ed first appeared on Conservative Home, 7th December 2017.
It’s over a year since Theresa May first hinted at action to cut energy bills. Since then we’ve had two Budgets, a General Election, a Clean Growth Strategy, the Helm Review, and now the Industrial Strategy.
But are consumers any wiser about how the Government intends to deliver affordable, sustainable and secure energy? I doubt it.
Actually, it’s not that hard. All ministers have to do is heed the advice that David Davis, the Brexit Secretary, recently offered our soon to be ex-EU partners: don’t let politics trump economics. Unfortunately, that seems to be easier said than done.
Here are five simple steps which Greg Clark can take to give British consumers reliable cheap green electricity. The good news is none of them involves spending any more taxpayer’s money.
Firstly, remind those MPs, however senior, who demand lower energy bills that capping prices does nothing to cut costs.
Calling for price controls may win populist plaudits as voter’s dream of transferring cash from fat cat bosses to poor consumers. But the reality is that talk of price caps merely scares investors who react by demanding higher returns to compensate for the political risk they perceive. The perverse consequence is to raise prices faster than if caps had never been discussed.
Secondly it’s competition which cuts energy costs, not price caps, so get tougher now in areas where it doesn’t exist. Neither National Grid nor regional distribution companies like UK Power Networks, a Hong Kong-controlled business which distributes electricity to every London consumer, have to win customers by offering a better deal than their competitors because they are, in effect, monopolies
These giants gobble up a quarter of what we all pay for electricity, but because they don’t directly bill consumers they are rarely mentioned by the tabloids and are insufficiently scrutinised by regulators. Shining a light on the performance of shadowy monopolies with unfamiliar names and complex activities may be harder than bashing British Gas, but it’s a lot more important and both Ofgem and ministers should do so.
Thirdly, introduce competition to cut the cost of green energy. At present support for low carbon electricity generators is dished out through contracts for difference which guarantee them a fixed return.
The Gpvernment picks politically-acceptable technologies while ignoring cheaper alternatives for fear of provoking controversy. The Coalition’s enthusiasm for offshore wind may have made Britain a world leader in this industry, but this has come at a very high price which has burdened consumers with unnecessary costs for decades to come.
It’s time that ministers insisted that future subsidies are confined to technologies which have a credible short-term path to grid parity and allocated through technology-blind competitive auctions. This will incentivise efficiency, cut costs and ensure value for money is secured.
Fourthly, recognise the limits on how far a modern economy, whose business and domestic consumers depend on an uninterrupted supply of electricity, can rely on intermittent energy sources. The welcome fall in the price of renewables doesn’t mean they can meet all our energy needs. Bloomberg New Energy Finance warned recently that even in 2040 there will be entire months in Britain and Germany when wind and solar produce little energy.
Nobody knows when flexible, low-cost, large-scale, long-term (as opposed to overnight or intra-day) electricity storage will become available. As much back up capacity will be needed in 2040 as now.
Furthermore, if half the projected mid-century demand for electricity is met by solar power, an area the size of all Kent and half Surrey will be covered by solar farms – not a prospect which a government which balks at solving the housing crisis by developing a few hectares of green belt will enjoy.
Finally, since by 2040 gas will be too polluting to have more than a small role, nuclear will still be needed as a reliable generator of clean electricity. This arithmetically unavoidable conclusion is anathema to anti-nuclear campaigners, who have mistakenly seized on the high strike price for Hinkley Point C to claim that nuclear is unaffordable.
They ignore the National Audit Office report on Hinkley which shows how reducing the cost of capital for nuclear new build dramatically cuts the eventual price of electricity. If the Department for Business could persuade the Treasury to share the advantage of borrowing money more cheaply than even the most creditworthy private company with nuclear developers, consumers would benefit directly.
Anti-nuclear campaigners also ignore the advances made in nuclear technology outside Europe, where several countries now build reactors which generate electricity as cheaply as other low carbon sources.
There are legitimate concerns about letting foreign companies into Britain’s nuclear market but the door has been opened, subject to approval by the Office of Nuclear Regulation, at Bradwell in Essex. It won’t be difficult to agree safeguards about shareholder control and IT systems to allay any fears.
These five measures will minimise energy costs. Clark won’t win plaudits for implementing them but in the medium term they will be more effective than urging Ofgem to cap tariffs. Together they constitute a bigger step towards ensuring that Britain has secure, sustainable and competitively priced electricity in the 2030s than any taken by his predecessors in the last 20 years.