Peers Report On Energy Fails To Address The Real Problem
By Paul Homewood
A new report by the House of Lords Economic Affairs Committee on energy policy attracted some headlines yesterday.
However, on further analysis, it seems to totally miss the point.
These are the key findings:
The Committee examined the impact of the policies of successive governments on the electricity market. In its report, "The Price of Power: Reforming the Electricity Market", published today, the cross-party Economic Affairs Committee identifies two key failures in the current market: the narrow amount of spare capacity, particularly in winter, and the rising cost of electricity to consumers and businesses.
In order to address the failures in the energy market the Committee recommends the Government should:
- Ensure that security of supply is always the first and most important consideration in energy policy. Affordability and decarbonisation must not be prioritised ahead of security.
- Ensure that decarbonisation is achieved at the lowest cost to consumers. Decarbonisation policies accounted for around 10% of the average domestic bill in 2013. This may mean waiting for the development of new technologies which can reduce emissions. The Government should make sure that the pace of reductions is flexible and not a rigid path to be achieved at all costs.
- Reduce and remove Government interventions in the market. The best way to do this would be to ensure that electricity generating capacity is secured through a single, technology-neutral, competitive auction for electricity supply. This auction would ensure that consumers are paying the lowest prices for low-carbon electricity.
- Establish an Energy Commission to provide greater scrutiny of energy policy decisions. This independent advisory body would report to the Secretary of State and advise on the best way for all the objectives of energy policy to be delivered.
- Create a world-class National Energy Research Centre which would search for new methods of producing cheap, clean energy and translate them into commercial applications.
- Outline its ‘Plan B’ in the event Hinkley Point C is delayed or cannot produce the anticipated power.
Although the Committee makes some valid points, it fails to show any understanding that both the problems outlined – security of supply and cost – are the direct consequence of decarbonisation policies, enforced by the Climate Change Act.
Instead, the blame seems to be being put on government process. The Committee Chairman, Lord Hollick, makes this clear in his comments:
Poorly-designed government interventions, in pursuit of the decarbonisation, have put unnecessary pressure on the electricity supply and left consumers and industry paying too high a price.
Hinkley Point C is a good example of the way policy has become unbalanced and affordability neglected. It does not provide good value for money for consumers and there are substantial risks associated with the project.
We would like to see the Government step back from the market and allow all generating technologies to compete against each other. It should establish an Energy Commission to ensure competitive auctions have independent oversight and are scrutinised carefully.
Hollick seems to be blissfully unaware that his own Labour party not only introduced the Climate Change Act, but has repeatedly called for even faster decarbonisation since.
First though, let’s look at some of the sensible points they make:
1) The UK currently has a slim capacity margin. The emergency tools available to the Grid to manage the margin have been effective in the short term. The Government has struggled to procure sufficient numbers of new power stations through the mechanism to ensure longer-term security of supply
2) The increased amount of electricity generated from intermittent sources presents new challenges for security of supply. As the proportion of electricity from these sources is projected to increase, tools to ensure cost effective back-up must be available and the cost of appropriate back-up incorporated into estimates of the cost of renewable generation.
3) It estimated that the proportion of electricity bills relating to climate change policies would increase to 24 per cent in 2020 and 26 per cent by 2030.
4) Industrial electricity prices in Britain are amongst the highest in Europe.
It never ceases to amaze me that anybody, least of all Parliamentarians, should be surprised at any of these issues.
The implications for electricity bills have been well publicised each year by the OBR in its annual Fiscal Outlook Report. And as I, not to mention the Energy Select Committee, have repeatedly pointed out, the true cost to the public, in terms of prices for goods and services, taxes etc, is triple what the Committee have said.
Equally, it has long been obvious that a deliberate policy of shutting down reliable coal power plants would leave capacity margins extremely tight.
It has also been just as evident that intermittent renewable energy cannot offer any security of supply.
The Committee takes particular issue with Hinkley Point. As readers will know, I have been every bit as critical.
However, the Committee fails to recognise that the need for new nuclear is a direct result of decarbonisation policies, as only nuclear can provide reliable baseload once coal and gas plants have been phased out.
The Committee whittles on about the relative costs of renewable alternatives, such as wind power, but fails to explain how they can provide security of supply.
Interestingly, they make no comments about potential alternative suppliers of nuclear plants.
None of their recommendations address the real issue, the Climate Change Act itself.
Instead they propose fiddling around at the edges.
For instance, they talk of a single, technology-neutral, competitive auction for electricity supply. Yet we already have this with auctions for CfDs. Of course, if all technologies (incl coal and gas) were allowed to compete, we really would get some answers to our problems.
They also suggest a new Energy Commission, but it is not apparent what that would do that OFGEM currently does not.
While we must be grateful to them for bringing these issues to public attention, none of their suggestions will make any material difference to solving them.
Only tearing up the Climate Change Act will do that.