‘The Government needs to radically re-think energy policies’ 

Economic growth, or rather the lack of growth, is now central to the economic or, indeed, the political debate. The economy has dipped since autumn last year and there are few “green shoots” of growth on the horizon. But, whatever our short-term woes, the British economy needs a really radical growth strategy in order to reverse the competitiveness lost over the last 10-15 years and prepare it for the challenges ahead. Infrastructural spending should be boosted, deregulation should be accelerated, the tax system should be simplified and, last but by no means least, the Government needs to radically re-think its energy policies, where “green policies” are undoubtedly adding to business’s bills, undermining their competitiveness. Manufacturing, especially energy intensive users including steel, cement and chemicals, are especially vulnerable to high energy costs, not with-standing some Treasury support. At a time when the government is keen for the economy to be “rebalanced” from financial services to manufacturing and from domestic demand to exports (where manufactured goods are still very significant), this is unfortunate to say the least.

A report recently submitted to BIS compared the impact of energy and climate change policies on electricity prices for energy intensive industries for a selection of major economies including the UK, China, Japan, Russia, the US, France and Germany.1 The findings were quite shocking. “Green policies” had already added more to Britain’s electricity prices than in any other country putting our manufacturing industry at a major cost disadvantage. Moreover, the cost disadvantage was projected to worsen by 2020. This really is a matter of shooting industry in the foot.

Britain’s “green policies” are so uniquely disadvantageous because of the extraordinarily “challenging” combination of climate change and renewables targets that is driving energy policy in this country. By the Climate Change Act (2008) Greenhouse Gas (GHG), principally CO2, emissions are to be cut by 34pc by 2018-22 and by 80pc by 2050 compared with the 1990 level. These are draconian cuts and tougher even than the EU’s. Whether this masochistic zeal is worth the huge costs involved doubtless depends on your views on the reality of anthropogenic global warming. But it is enlightening to put Britain’s, and indeed the EU’s, CO2 emissions into some global context. Britain’s CO2 emissions are about 1.5pc of the world total and even the EU27’s share is only 12pc. Meanwhile China’s emissions, at nearly 24pc of the global total, are rising quickly. Where we lead others including China and India may follow – but probably not.

The EU’s Renewables Directive commits Britain to sourcing 15pc of final energy consumption from renewables, crucially from a low base, by 2020. No other major EU country faces Britain’s huge challenge. It should be noted that compliance with the Renewables Directive does not in itself tighten the CO2 targets, it merely dictates how they are partly to be met. In the battle against global warming the renewables target is irrelevant. Britain’s renewable technology of choice is wind-power for generating electricity, nuclear power does not count, which is very costly.

And, yes, wind-power is very costly. DECC has commissioned studies into the levelised electricity generating costs, after allowing for carbon costs, for the key technologies.2,3,4 Three very broad conclusions can be drawn. Firstly, the least cost technologies tend to be combined-cycle gas turbines (CCGTs) and nuclear power, with onshore wind, at this stage, in contention. Secondly, the high carbon costs make coal-fired power stations uncompetitive and, thirdly, offshore wind is very expensive and very uncompetitive.

But these figures flatter onshore wind-power as they make no allowance for the “add-on” costs associated with the technology. Wind-power is unreliable and requires conventional back-up generating capacity when wind speeds are, for example, very low or rapidly varying or zero. (Ironically the wind is especially unforthcoming during prolonged cold spells which are associated with areas of high pressure.) The use of this back-up capacity, which tends to be inefficient, inevitably increases the overall costs of wind-power. And it is quite misleading to compare the costs of wind-power with other technologies if they are excluded. In addition, there are other costs. For example, transmission costs from generators to consumers tend to rise as wind farms tend to be situated in the north of the country (in order to exploit higher wind speeds), but demand is weighted towards the south of the country.

Estimates of all these “add-on” costs are inevitably problematic but data quoted by the Renewable Energy Foundation suggest they can be very substantial, adding £60/MWh (about 65-70pc) to the cost of generating electricity using onshore wind and £67/MWh (about 50-55pc) to the cost using offshore wind.5 Allowing for these costs makes onshore and, especially, offshore wind horrendously uncompetitive. Even if the extra costs were half of these estimates, for the sake of illustration, wind power would still be uncompetitive. Wind power is a folly for which businesses and, let us not forget, domestic consumers pay dearly.6

And here’s the final rub. Once allowance is made for the inefficient use of back-up generating capacity, wind power turns out to be an expensive and inefficient way of reducing CO2 emissions when compared with the option of investing in efficient and flexible gas combined-cycle plants7 or indeed nuclear power. Dutch physicist Kees le Pair has even estimated that the use of wind farms actually increases CO2 emissions, paradoxically, compared with using efficient gas combined-cycle plants at full power.8 Of course, this is not the way in which the case is usually presented. Not only are the “cash” costs of having to use back-up capacity frequently forgotten when discussing wind power but the “emissions” costs are too.

*Ruth Lea is Economic Adviser to the Arbuthnot Banking Group

References

1. ICF International, “An international comparison of energy and climate change policies impacting energy intensive industries in selected countries,” July 2012, report submitted to BIS.

2. Mott MacDonald, UK electricity generation costs update, June 2010, commissioned by DECC.

3. DECC, Electricity Generation Cost Model – 2011 update revision 1, by Parsons Brinckerhoff, August 2011.

4. DECC, Review of the generation costs and deployment potential of renewable electricity technologies in the UK, by Arup & Partners, June 2011.

5. Renewable Energy Foundation, Energy policy and consumer hardship, 2011, estimates by Colin Gibson.

6. Ruth Lea, “Electricity costs: the folly of wind power”, Civitas, January 2012.

7. Gordon Hughes, “The impact on wind power on household energy bills”, Global Warming Policy Foundation, 2012.

8. C (Kees) le Pair, “Electricity in the Netherlands: wind turbines increase fossil fuel consumption and CO2 emissions”, October 2011.