The UK’s Energy Policies are a Complete Mess

As a whole, even terrible Governments will have the odd sound policy or good idea. One such idea that’s rumoured to be floating around is that the UK’s fleet of coal plants will be closed down, moved to CCS (carbon capture and sequestration), or moved to alternative fuels. Whilst this itself is an excellent idea, it has significant consequences, because, as of the second quarter of 2015, coal provided about 20% of the UK’s generation in terms of raw TWh. This capacity will need to be replaced, but is likely to be replaced in part by the flagship Hinkley Point C.

HPC is supposed to contribute a capacity equivalent to 7% of the UK’s generation, and a significant amount of the rest of the energy gap will be met by closed-cycle gas turbines. The problems with HPC are numerous and include, but are not limited to; it’s too expensive, the technology is unproven, and the generation technique itself is completely inflexible- not to mention all of the other caveats which surround nuclear generation. The only two other plants of the type Hinkley C will be, the EPR (European Pressurised Reactor), are already running years behind schedule and well over budget.

European nuclear reactors have a load factor (the percentage of generation which is actually generated by plant as a proportion of how much it would generate if it were operational 24/7 365 days a year) of around 78%, but, when operational, nuclear plants have to be operated at a relatively fixed, high level. As renewable penetration increases, this becomes a major problem because increased penetration of renewable energy into the network necessitates the network being more flexible and diverse to cope with fluctuations in weather patterns.

Climate skeptics, and other people who are generally wrong about more things than energy, like to infer that this is an insurmountable obstacle and that wind energy should be curtailed because of it. It isn’t insurmountable; engineers put men on the moon using computers with power comparable to that of a modern calculator- intermittency of energy sources is a relative doddle. If wind power fluctuates, there are a multitude of ways this fluctuation can be met, whether that is varying the output of other generators or, in future, incorporating demand-side control in households or industry to vary consumption or other such “smart” techniques.

The Conservatives, via their reforms of energy markets and subsidies, are effectively making variable sources less attractive to investors and attempting to divert investment towards nuclear and CCGT, whether that be cutting subsidies of wind via the Renewables Obligation or slashing the Feed-in Tariff rates for solar. The problem with this is that CCGT and nuclear are simply not as flexible as other sources of generation. Nuclear can be treated as essentially fixed in output, whereas CCGTs can vary about 10% of their output to help mitigate fluctuations but can take anything up to four hours to come up to speed on the network. The output of wind can fluctuate in a matter of minutes, which makes forecasting supply and demand on 40-year old electricity infrastructure incredibly difficult.

The Government’s justification is that they have essentially invested enough in wind to meet their targets and have no desire to continue to subsidise an industry they claim is capable of standing on its own two feet- many schemes such as the Renewable Heat Incentive are designed not to reward generation but to incentivise new investments in the short term until the subsidy schemes can be shut down.

It may or may not be the case that the wind energy can survive on its own now, but, given the billions of pounds the industry is worth to Scotland and the Highlands and Islands in particular, the decision feels like a way for the Conservatives to appease turbine-averse Green-belters whilst maintaining the visage of being fiscally responsible and cutting back government subsidy of the industry whilst losing few votes over the issue. After all, Scotland will be worst hit by the cuts to wind, but the Tories have but one MP to lose up here.

Of course, when it comes to energy, the UK Government are anything but fiscally responsible. HPC has an agreed strike rate (price per MWh of electricity generated) of around £92 per MWh (nearer £94 now due to inflation), increasing with inflation for the period of operation of the power plant. Total costs for the plant, including capital, loan guarantees, etc, could be as much as £175 per MWh compared to a global average for nuclear of ~£100perMWh. To put that in perspective, the new subsidy scheme to replace the RO is Contracts for Difference and has assigned a strike rate to onshore wind power of £82/MWh.

The Government set a limit for its total subsidy of renewable energy via schemes like the RHI and CfDs of £7.6bn (which it is almost certain to overrun anyway), but the overnight capital cost of Hinkley alone could be over £8.9bn for EACH reactor at Hinkley C. Almost £17.8bn of taxpayer money spent on a reactor type which is relatively untested, unproven, and hideously expensive. Adding to that, if there are any incidents, it isn’t EDF and the Chinese government which will pick up the bill – it’ll be the UK taxpayer and the local people affected. The Conservatives are lumbering the UK taxpayer with a scandalously large bill and a hulking mess of a nuclear reactor that may be entirely incompatible with our future energy network needs.

The inflexibility of nuclear power is almost as much of a problem as the intermittency of wind because it simply cannot react to rapid changes in network stability. Politicians like to talk about the concept of “baseload” because it sounds like they know what they’re talking about, but right now research is heavily geared towards technologies and ideas which would render the concept of “baseload” utterly obsolete in the future, particularly in the area of transmission and control technologies. Energy policy decisions need to be made with the next 20, 30, even 40 years made in mind- but decisions are being made based on concepts reliant on architecture which is as much as 40 years old.

The biggest beneficiaries of HPC will be EDF’s shareholders at the expense of wind and solar projects whose subsidies are being slashed. I don’t begrudge EDF for this, of course- they’re a business and they exist to make money. Electricity is a product and generators want to make electricity so they can sell it to suppliers on the retail market at as low a marginal cost and as high a profit as possible, so there’s little incentive for generators or suppliers to focus on efficiency or demand reduction techniques.

At a fundamental level, state aid for HPC is utterly outrageous. So outrageous, in fact, Austria challenged the project at an EU level. The EC allowed the project to go ahead with the caveat that repayment mechanisms had to be made more stringent, but given the anti-renewables reforms being pursued this could again resurface as an issue if it’s found to bias the market against renewables. The UK Government’s position is indefensible – it claims renewable energy should stand on its own merits, and let the market support it, whilst simultaneously throwing billions of pounds at a single project with little social, environmental, or economic justification because they know the project would not be supported by the market.

The UK’s energy reforms are disproportionately benefiting a single nuclear project at the expense of small-scale renewable electricity generators nationwide. As the Director of Policy of Scottish Renewables stated; “ending the [RO] one year early could have a devastating impact on onshore wind developers and supply chain across the country with around £3bn of investment in Scotland being put at risk. The impact of this decision will be felt more harshly in Scotland because the biggest proportion of projects being developed in the UK is here.”

If one were cynical, the natural reaction to this would be to say “of course you would say that, it’s costing you money”, and to some extent that isn’t an unfair take on the situation. The UK Government is claiming it is cutting subsidies for the sake of, amongst other things, fiscal responsibility. It is in actual fact damaging small-scale private industry in favour of a single, massive project being constructed by massive energy corporations (who effectively exist in an oligopolistic electricity market). This suggests either EDF have among the most effective lobbyists in the world, or that a lot of people in the Conservative Party own shares in EDF.

The HPC fiasco, then, is but symptomatic of completely dysfunctional UK energy policy. To exacerbate this, as environmental protection is a devolved matter to Holyrood, Scotland has its hands tied behind its back when it comes to energy. It can veto developments and offer loans to help scope and develop small projects through CARES, but only up to £150,000. It lacks the power to fundamentally change the energy market using tools such as regulation via Ofgem or larger-scale subsidy programmes.

The SNP and the Conservative Party also have diametrically opposed views on energy, most notably concerning shale gas. Scotland have a moratorium on UGE/fracking and underground coal gasification (UCG) but could still be affected by water pollution from English fracking rigs- and land throughout Scotland has been licensed for UGE and will not be immune from the ensuing socioeconomic effects of currency inflation that normally accompany resource booms.

Having energy and the environment being reserved to different Governments with such conflicting views is unproductive at best and politically incendiary at worst, and in many ways is a microcosm of devolution as a whole; Scotland has some powers devolved, and can do a lot of good with what it has, but at times must operate as though eating soup with a fork.

If the rest of the UK pursue a major fracking industry, a major concern will also be how the UK mitigates the socioeconomic externalities associated with rapid expansion of energy resources, also known as the Natural Resource Curse. Even a cursory examination of the UK economy before and after the North Sea Oil boom highlights the profound socioeconomic changes which ensued during the period.

Table 1 shows how employment by sector changed as the oil industry expanded- particularly the move from labour-intensive manufacturing jobs to service jobs. (data taken from the ONS)

labourstat

Table 1 – Employment by sector in UK and E&W

More strikingly is how the sudden growth in oil exports affected the UK’s export markets and tax policies. Figure 1 shows UK exports over time with data taken from the World Bank.

oilexports

Figure 1 – UK exports by sector over time

One should remain wary of conflating correlation with causation, but studies continue to show links between growth in oil wealth and associated negative effects on socioeconomic indicators. Professor Terry Karl states that “hazardous wastes, site contamination, and the lack of sufficient protection of surface and subsurface waters, biodiversity and air quality have endangered the health of local populations near oil installations  and pipelines and destroyed local livelihoods such as farming and fishing” (Karl 2007) [in developing nations in particular]. The UK has robust environmental protection legislation, in part supported by EU Directives such as the Water Framework Directive, but the “Dash for Gas” and Tory Euroskepticism threatens to undermine this entirely, particularly if the UK decides to leave the EU altogether.

Karl also states that, as rents from oil and gas resources increase, this facilitates the state reducing the tax take from citizens and instead indulging in rent-seeking behaviour. Table 2 shows the UK’s tax rates during the first oil boom, taken from IFS statistics.

tax_rates_UK

Table 2  – Historic UK tax rates

There is no reason whatsoever to assume that the Conservatives will not use growth in natural gas rents from a growing shale industry to cut taxes and shrink the state even further. Stiglitz, in Globalisation and Its Discontents, suggests that the misuse of oil resources is symptomatic of more widespread dysfunctionality associated with market liberalisation, whereas R. Auty found that “variations in economic performance are caused by differences in the quality of governance that are linked through the type of political state and the pattern of structural change to the natural resource endowment”. Further, that “domestic economic policy is more important than natural resources in driving economic growth”.

Now, this may seem like a digression, but it is entirely relevant. The UK used its last energy resource boom to deindustrialise, shrink the state, and fundamentally move the UK towards being a service-intensive, export-light economy. The inflation of currency hurt people on low incomes but house-price growth and a booming financial sector helped turn London into the economic behemoth it now is. As the modern economy continues to change and adapt as technology increasingly automates low-skilled labour jobs, and with such a fiscally conservative Government so keen to see a surplus, it’s entirely feasible that oil and gas rents could help the Conservatives to reduce taxation further and utilise resource rents instead whilst continuing to cut back on public services.

Tina Rosenberg, a journalist writing in the NY Times, made the observation that “if a government can finance itself through the profits on oil, it needn’t collect taxes. Let me suggest that this is not a good thing. Taxes create accountability — citizens want to know how the government is spending their money. Substituting oil revenues decouples government from the people. ” Rosenberg posited that the reason Norway prospered when it found oil was it “had the foresight to become wealthy and democratic before striking oil.” It must be remembered that, when the UK struck oil, it was in the era of the Three Day Week and the Winter of Discontent. Britain was in pretty shoddy shape. It is in a period of relative economic stability today, but with significant welfare cuts and trade union reforms on the horizon there’s no guarantee of continued social and economic stability.

With the UK’s profound renewable energy resources and the industrial skills and research base, throwing money at nuclear power and shunning renewable energy investment in the process is a stunningly regressive move. Further to that, more important than moves to utilise CCS on a major scale should be moves to make fuel itself more environmentally sustainable through development of waste-derived biofuels and utilisation of waste-derived landfill gas which has seen incredible growth in Scotland since reforms of waste management in 2000- as can be seen in table 3.

energySco

Scottish energy generation by source up to 2013

Research is ongiong into the utilisation of kelp-derived biofuels which could be a boon for rural, coastal communities in the Highlands and Islands. Equally as important is reduction of consumption of fuels through schemes such as improved public transportation networks.

Scotland has been relatively savvy with the powers that it has, which I’ll discuss in more detail another time, but remains hamstrung by the utter ineptitude of the UK policy frameworks in which it must operate. Although reforms are forthcoming, there is still little market allowance for flexibility of generation and no regulatory frameworks to make it happen- and I have little faith in the Government to ensure that any reforms in this area would be anything other than cack-handed.

Political friction, funding bias, and unnecessary cuts to subsidies undermine one of the UK’s greatest economic assets (its wind), and a Government pursuing potentially socioeconomically destructive rent-seeking behaviour from shale gas and oil could undermine the competitiveness of renewables whilst encouraging further reliance on CCGT and nuclear electricity plants. A wind turbine can always be dismantled if technology develops and they become obsolete – but a nuclear power plant will take decades to decommission, assuming we ever develop the technology to fully restore the contaminated land on which former nuclear sites sit.

Of course, renewable energy is not without its caveats. Intermittency and variability are technological problems which need addressed, and market reforms are needed to accommodate expansion of distributed generation and the requirements of a more dynamic electricity grid if we are to continue to pursue a private-ownership electricity market. Furthermore, renewable energy is not automatically less socioeconomically harmful than other natural resources if the ownership models and regulation are inadequate, illustrated by a study in Italy which found a connection between high windfarm construction rates and criminal corruption (Gennaioli and Tavoni 2011).

The UK is making the wrong policy choices based on flawed reasoning and is either ignoring, or ignorant of, the socioeconomic, technical, and environmental consequences of their decisions. Cutting feed-in-tariffs for solar will result in private businesses collapsing as they may not be ready yet to survive purely on market support, similarly with cutting the Renewable Obligation early for onshore wind developments which disproportionately harms the Scottish renewable energy industry and undermines financial profitability and feasibility projections for businesses.

Any wholesale move towards nuclear could prove to be a profound waste of taxpayer money and may be incompatible with the needs of a future electricity grid which may in turn lead to stranded assets or underutilised facilities. We may in future be stuck with nuclear plants supported by billions of taxpayer pounds which are utterly useless. For all the Conservatives criticise Labour for their eagerness to utilise PFI, at least they built schools and hospitals, not radioactive millstones like Hinkley.

The UK urgently needs to re-evaluate its energy policies, particularly given the divergence between the incredible potential of the renewables energy industry in Scotland and the desire to expand shale gas and nuclear energy in England and Wales at the expense, in particular, of Scottish wind. The fractured nature of energy/environmental legislation is counterproductive and essentially reduces the Scottish Government to planning officials regarding energy developments who are unable to fundamentally change the energy markets or regulatory apparatus in any way which could reshape the energy networks.

There are two obvious solutions to this – devolve Ofgem and energy policy to Holyrood, or take environmental policy back in-house to Westminster. Given the Conservatives’ record on energy and the environment, the latter doesn’t bear thinking about. The shape of the future network is going to be radically different from what it is today, incorporating artificial intelligence, smart control, and dynamic integration of renewable technologies and interconnectors across borders, requiring continental-level cooperation. That cooperation must stem from organisations like the EU and must be supported by a competent Government.

Yes, we probably need some CCGT, and, yes, maybe nuclear has a role to play in the UK as a whole – but not like HPC, and not without small-scale solar or Scottish wind. The Conservatives act as if they want our energy policy to remain in the 90s and are playing very dangerous games with the EU- which will be essential for modernising the electricity networks- all for electoral populism. Interconnection with Europe may alleviate some of these problems, and some interconnectors are being planned as part of the Government’s response to the EU Supergrid concept, but if the UK pulls out of the EU it could drastically hinder a pan-European energy market.

The Conservatives are not only hindering renewable, sustainable energy developments, they are being capricious and hostile. Because they plan to cancel biomass subsidy early, even Drax, one of the biggest coal plants in the world, have cancelled a planned expansion of CCS. The Energy Policy Group of Exeter Uni were absolutely damning of the Energy Secretary, the esteemed Amber Rudd, making comments about there being no “magic money tree” for renewable subsidies – particularly given the magnitude and longevity of subsidy for the nuclear power industry which, as has been exhaustively described, is still having money thrown at it after almost 60 years.

They state that “the Climate Change Levy, a tax to reflect the carbon content of fossil fuels, will be extended to include renewables, so removing a measure that once rewarded the ‘greenness’ of renewable energy. The result, according to lobby group RenewableUK as reported in the Guardian, will be an additional cost to green energy producers of around £450m in the current financial year, and up to £1bn by 2020-2021.”

“At the time of writing, business fallout had already become evident, with the announcement that two solar PV and energy efficiency firms had gone into administration with the loss of nearly 1000 jobs, their owners citing the government’s policy shifts as a significant factor.”

Energy is a fundamental component of a developed nation’s economy, but the Conservative Party’s handling of it is inept, verging on negligent.

Further Reading

Auty, R. M. 2000. How natural resources affect economic development. Development Policy Review. 18(4): pp.347-364.

Gennaioli, C. and Tavoni, M. 2011. Clean or ‘Dirty’ Energy: Evidence on a Renewable Energy Resource Curse

Karl, T. L. 2007. Oil-led development: social, political, and economic consequences. Encyclopedia of Energy. 4: pp.661-672

Stiglitz, J. E. 2002. Globalization and its Discontents. New York.