Too much government meddling undermines the energy market

July 19, 2012

Pity Ed Davey. At some point in the next few months, the Energy and Climate Change Secretary is going to have to sit down and decide how much nuclear power is going to cost for the next few decades.

It is not an easy decision. On one side are nuclear firms threatening to pull out of building new power plants if they do not get the price they want. All those jobs not created. All that low carbon energy not generated. All those windfarms that will have to be built instead, with all their protest groups and angry backbench Tories. On the other side are households and business, already worried about rising energy bills. And don’t forget those greens, many of whom are hostile to nuclear power and ready to protest to prove it.

It is not as though it is the only decision in his in-tray. Coalition infighting this week prevented the long-awaited announcement of subsidies for wind turbines and other renewable technologies. A decision is now expected in the autumn. Investors are angry, WWF is angry, the CBI is angry. We now have the situation where it is likely the Prime Minister is going to have decide how much subsidy windfarms should receive. How did we get to this ludicrous position, and how do we get away from it?

In recent years, government has moved to make more and more decisions in the energy market. The new Energy Bill going through parliament could even require officials to decide how much new gas-powered generation will cost.

This government takeover of the energy market creates major risks. No matter how much you model and consult, no matter how wise the experts making the decisions, things will happen in the future that you could not predict. Fossil fuel prices will bounce up and down, the carbon price may surge, new technologies will undermine assumptions (look at how shale gas has transformed the US energy market or how solar costs have tumbled).

The best way of dealing with future uncertainty is through using, wherever possible, market mechanisms. This allows investors, not billpayers, to carry the risks of new power plants. Competition means the amount of energy you generate, not your lobbying power, determines success. It allows flexibility when technologies emerge or prices shift. It avoids the Prime Minister having to think about how much each swoosh of a wind turbine should cost us during his summer holidays.

That is not to say that government has no role in the energy market. Firstly, it needs to establish an effective carbon pricing regime, either through the EU Emissions Trading System or a carbon tax. Secondly, it does need to nurture new low carbon technologies with simple subsidy, but with unrelenting focus on getting costs down for technologies that will make a difference to global emissions. Instead we have chosen an arbitrary political target of 15 per cent of our domestic energy from renewables by 2020. This leads to a too-fast rollout of expensive, immature technologies pushing up electricity bills without making any extra global carbon savings.

Finally, where it has put itself in a position where it needs to make decisions, it actually has to make decisions. Stasis over renewable subsidies and the still-to-be-plugged gaps in the new Energy Bill are the worst of all possible worlds.

Some have argued for the scrapping of the Climate Change Act and a new focus on coal and nuclear. However, this falls into the same trap as all champions of particular technologies. It is far from clear that new nuclear is going to be any cheaper than onshore wind, for example. Scrapping the Climate Change Act would be counterproductive. The act sends a clear signal to wavering European countries and international negotiations that the UK is serious about climate change. But we should also set a compelling example by meeting carbon targets as cost-effectively as possible.

This article originally appeared on The Spectator’s Coffee House website

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