Every strategy reaches the point where renewal is necessary. Time erodes what once seemed logical. Technology transforms the range of possibilities. Assumptions turn out to have been false flags. That is the situation now for the UK’s energy policy as spelt out in a report published last week by the economics committee of the UK House of Lords*.
The existing strategy flows from the 2008 Climate Change Act, which gave priority to the reduction of carbon emissions. A target of an 80 per cent reduction by 2050 was entrenched in law and, although it has never been clear how it would be enforced, the existence of a legally binding target has shaped decision-making in Whitehall. The goal, to be reached in five-year steps, overrides every other consideration — including cost and security of supply.
Several assumptions underpinned that legislation:
Nations were about to adopt a common approach to climate change at the Copenhagen conference so there could be no worries about the costs of action damaging UK competitiveness or of emissions simply being produced elsewhere
The prices of oil and gas would inexorably rise because of a combination of growing demand and scarcity of supply
As hydrocarbon prices rose, even heavily subsidised supplies from offshore wind or new nuclear would look cheap
In the process, the UK would build a great new industrial sector providing hundreds of thousands of low-carbon jobs.
The risk of designing a policy around wishful thinking could hardly be better illustrated.
The problems caused by these false assumptions have been compounded by mistakes in implementation. Rather than allowing the target to be met by open competition to find the least expensive answer, ministers promoted specific technologies irrespective of cost. Commitments to intermittent sources such as wind were taken without regard for their impact on the economics of other businesses, such as gas-fired power generation — which is low cost and relatively low carbon.
Some potential solutions, like improving energy efficiency, have been neglected or, as in the case of the so-called Green Deal home energy-saving scheme, laughably ill-designed and ineffective. Investment in research has also been neglected — almost all the recent gains in solar and wind technology have come from the US and China. The figures produced by witnesses to the committee such as Sir Richard Friend, Cavendish Professor of Physics in Cambridge, demonstrate how much UK investment in research has fallen back.
Each unintended consequence of the mis-steps has led to more intervention with government transferring detailed decision-making to Whitehall. That has left ministers and officials vulnerable to lobbying by those in search of what Americans would call corporate welfare. Hinkley Point is the most expensive example of this but it is not the only one. The funding of wood chips as a supposedly low-carbon fuel was exposed in a paper from Chatham House published last week.
Security of supply has been made more vulnerable by the clumsy way renewables have been promoted. The lights are not likely to go off but consumers will find themselves paying through the nose to keep them on. The costs will grow still further if the promised supplies from new nuclear (supposed to provide up to 14 per cent of generating capacity by 2030) do not come onstream on time for technical or financial reasons.
The critique by the Lords committee may be dismissed by some as the work of climate deniers. That is not justified. The report does not question the 2050 target but rather the effectiveness of the policies chosen to reach it. Nor does it dispute the need for the government to be involved. A strategic direction is essential but micro management is not.
The committee’s recommendations start with a reordering of priorities to establish security of supply as the overriding objective. Within a overall strategy set by government, an independent and professional energy commission would be responsible for delivery — for instance by managing open, transparent auctions to identify the cheapest ways of meeting the objectives of security and emissions reduction.
Perhaps most important is the call for a properly funded research centre modelled on the US national laboratories. Following the example of the Crick Institute, set up to advance biomedical science, a UK National Energy Laboratory should be established to identify new ways to deliver a system that would be both low cost and low carbon. As a brilliant recent report on disruptive technology from the Grantham Institute demonstrates, that is how real progress will be made and is where Britain’s skills could make a difference to the global challenge of climate change. I will return to the Grantham Institute’s work in a future post.
The paper from the Lords is not the last word. There are many more aspects of policy to be re-examined — from the North Sea, which is slipping dangerously towards terminal decline, to the transport system and implications of the prospect of significant electrification over the next two decades. In the retail market there is an unresolved issue of trust. But the report is important because in a very careful and judicious way it demonstrates the extent to which the existing strategy has failed and opens the door to a serious debate on what should come next.
*I had the daunting privilege of being an adviser to the committee, which includes senior businessmen and academics, two former chancellors and three former permanent secretaries.