Three years ago, in a utility conference in Atlanta, I sat through a keynote by Tom Fanning, President and CEO of Southern Company – one of the largest US utilities. In a typically Texan barn-storming style, he argued that “to improve human existence let’s use more energy where we should”, going on to promote the message that every Texan in every trailer park was equally deserving of air conditioning and a 60” TV.
It wasn’t what the audience expected, many of whom had come with concerns about smart meters, energy efficiency and outages.
Don’t worry about energy efficiency
Earlier this week I sat through the IET’s annual Mountbatten lecture, given by Dieter Helm, Professor of Energy Policy at the University of Oxford. The subject was the New Energy Landscape – low fossil fuel prices, decarbonisation and new technologies, based on his updated book – “The Carbon Crunch: How we’re getting climate change wrong – and how to fix it”. Much to the surprise of the audience, this time mainly engineers involved with the energy industry, he gave much the same message – that’s it’s time to stop worrying about the cost of energy or energy efficiency. Instead we should be planning a future where we can use as much as we want.
I urge you to watch his lecture, which is available on the IET website. At the risk of oversimplification here’s my very abbreviated take on it, as well as some of the potential problems in changing Government policy.
Over the last twenty years, most of the UK’s energy policy has been based on a belief that oil prices would continue to rise. As a result, Messrs Milliband, Huhne and Davey – the cross-party triumvirate of Ministers of Horrendous Destruction pursued a centralist energy policy that was predicated on ever rising energy prices. Rather than investing in new capacity, they preached the mantra of ever greater energy austerity, with domestic energy efficiency programmes aimed at capping total demand. To make the policy appear palatable, it was wrapped in the smug PR of a Government climate change agenda, where successes in achieving local carbon reductions have concealed the fact that we’ve exported our carbon emissions to other parts of the world.
Government policy should be market driven
But that scenario of rising oil prices never happened. With fracking and more production coming online in the Middle East, we now have oversupply, with little prospect that it will change. Rather than continuing to rise, oil process have halved and are likely to continue downwards in the future.
You wouldn’t recognise that if you look at your energy bill. Although domestic demand in the UK has fallen for the last ten years, and oil prices have halved in the last two, electricity bills continue to go up. That’s because a growing proportion of the bills have been used to fund Government subsidies which support expensive renewable projects like offshore wind and biomass. Strip those out and energy would be a lot cheaper.
Professor Helm’s thesis is that we’re in that position because Government policy has been to dictate “clean” technologies, regardless of the expense. That’s not a market driven approach. Instead he suggests that policy should be market driven, with companies bidding to provide a specified amount of generation capacity with a constraint that it needs to meet carbon emission limits.
All bids should be based on “Firm Power”, and suppliers would be paid for each MWh of power they feed into the system. Firm power means that they contract to supply an agreed level of capacity from a fixed start date. If their power station builds run late, they need to find alternative supply. If they provide intermittent power from renewables, they need to acquire additional capacity to cover the demand. They commit to supply and take on the responsibility to obtain and supply the agreed quantity of power. There will be penalties if they fail. It can be wind, gas, coal with sequestration or nuclear – all the Government needs to be interested in is running an auction to obtain it.
The market decides on the relative composition. Emissions are capped, as that was an implicit part of each contract.
To reiterate, the only two things that Government energy policy needs to concern itself with are the overall quantity of power the country needs (including a realistic safety margin) and the maximum carbon emissions allowed from generating it.
As new generation and storage technologies emerge, the costs should go down. When that happens, generation may move to a zero marginal cost model where the cost of supplying more power becomes small. At that point we move to a new world where electricity is there to be used for anything and we see the electrification of everything – transport, heating and manufacturing. As transport becomes electric, the demand for oil will fall further, pushing the price even lower. When all of this occurs, utilities in their current form may become irrelevant.
Current policies are fabricated
John Loughhead, the Chief Scientific Adviser at DECC, was called upon to provide a vote of thanks. It wasn’t the most ringing endorsement for a lecture I’ve ever heard. He observed that parts of the talk reminded him of his childhood Boy’s Own books, which suggested a future of free nuclear power. He pointed out that “we operate in directions and constraints that are fabricated by our political and financial structures. It’s not the question of what technically can we do, but a question of what we can do in an effective way that contributes to what our social needs are?” It struck me that in using “fabricated” he made an unconsciously wise choice of word. Our current policies are fabricated, not evidence based.
Professor Helm’s argument is a compelling one. The question is how to change policy?
As the applause was dying down the person in the seat behind me remarked to his colleague that, “of course, he’s only an economist, not an engineer”. The person to my left heard it and muttered “good point”. As I mingled with the other IET members after the event, I heard that “he’s only an economist” comment two more times, along with a succession of conversations saying it had been an enjoyable evening, but that it wasn’t what the real world is like.
Fear of change
It all comes back to that fear of change, which was so well summed up some forty years ago by the Vogon construction engineer in the HitchHiker’s Guide to the Galaxy “What do you mean – why's it got to be built? It's a bypass! You've got to build bypasses”. Once an industry is established and the norms have been set it is incredibly difficult to change.
The problem with most energy policy is that it’s been written or heavily lobbied by those with a vested interest. Think of what the outcome would have been if a committee of dinosaurs had been asked to design mammals. After a few millennia of debate, their criteria would probably have been mammals should be tasty and easy to catch, and on no account must they eat eggs.
When the cataclysm came, the dinosaurs would still have perished, but there would be nothing left to take over. If that sounds a bit like the current UK energy policy, that’s not surprising – we’ve let the dinosaurs design it.
The accepted norm at DECC (Dinosaurs Encouraging Climate Change) has become increasingly set in stone for the past two decades, as was illustrated by the graph Professor Helm showed illustrating different views of the expected wholesale electricity price for the next fifteen years. DECC still expects prices to rise until 2030, whereas Aurora Energy Research, an independent energy analyst (Prof. Helm is on its Board), expects them to fall consistently over that period.
Now look at another set of predictions from DECC, which are the prices the Government has guaranteed for different forms of renewable energy projects.
For a new generating technology to be economically viable, it should not be significantly higher than the current wholesale price, which is the blue line in the first graph. DECC’s figures mean that deals like the recently announced Hinckley Point agreement at around £92/MWh would still be more expensive than the wholesale electricity market price in 2030. It might just become economically viable if the price of oil continued to rise from 2030 to 2040. But it almost certainly won’t. Aurora’s figures indicate that the Government will just be burning taxpayers’ cash. Looking at other technologies, large solar and onshore wind might be competitive around 2028 if you believe the blue line, but offshore wind and waste will never be economic.
On the other hand, if we believe the Aurora projections, then nuclear from the current contract would cost double the market price. In other words, we might as well move from burning biomass to burning taxpayer’s banknotes.
With a largely consistent, but misguided approach from DECC and Governments of each different political persuasion over the last twenty years, it’s difficult to know who is fooling whom – whether politicians fail to understand the reality (likely), or civil servants, afraid of facing reality, are hiding behind the bogeyman of climate change (equally likely). What is clear is that something needs to change. Micromanagement by successive Governments and DECC has failed to give us a credible energy policy. The recent cut in subsidies for renewables is a step in the right direction, but we don’t yet know whether that’s the start of a joined up energy policy, or just an opportunistic austerity cut. Professor Helm’s solution may be too radical, whether or not it is correct. One thing that is clear from the conversations at the end of the IET lecture is that the bulk of the industry appears to be firmly in line with DECC in seeing any change as a bad thing. If we need the lights to stay on, that attitude needs to be swept away.