Are Tories and Libdems fighting over green energy? Not exactly


8:52 am - September 6th 2011

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contribution by Gary Dunion

Yesterday, the Daily Telegraph’s stark above-the-fold headline warned: Reforms add £300 to energy bills. A leaked memo (now here) authored by Number 10’s energy advisor, Ben Moxham, warns that green energy and energy efficiency measures will increase household bills by a third by 2020.

He attacks the Department of Energy and Climate Change’s projections (PDF), which have the net cost of green measures at just 1%, or £13, by the end of the decade.

Rabid commenters on the Telegraph and Daily Mail websites, pounced on this revelation of the hidden costs of green energy. Westminster villagers saw only the politics of Huhne’s rough treatment by Cameron’s team.

But both are misreadings of Moxham’s complaint.

Firstly, a substantial proportion of the gross cost of ‘green’ policies is actually accounted for by the support for nuclear power.

With the Renewables Obligation already supporting true renewable electricity, the government’s proposed carbon price floor (a minimum below which the price of carbon trading credits cannot fall) is interpreted as being primarily targeted at subsidising new nuclear plants. Unless they plan to stop funding new nuclear stations, that figure won’t fall.

Secondly, Moxham actually seemed to take little issue with DECC’s costing of clean energy. Instead, he trashes their projections on take-up of energy efficiency measures, saying the ‘hassle factor’ will cause people simply to pay through the nose rather than take action to cut bills.

If he’s right, the story here isn’t that green energy is any more expensive than expected; rather it’s that insulation isn’t well-supported enough.

The Green Deal will mean that, for homeowners at least, there is no significant economic barrier to greater energy efficiency. This then, is largely a behavioural problem – this is the part the Nudge Unit was born to play.

There are a number of measures which, at little cost, could ensure we achieve as much in demand reduction as in clean supply: showing neighbours’ average consumption on energy bills, including popular technology like solar panels (which have no problem with take-up), or tweaking tenancies to incentivise landlords to take an interest in the efficiency of their properties.

But of course the reason the Nudge Unit sits in Downing Street is that this kind of intervention requires cross-government thinking.

This is a test of whether the Coalition are capable of that, or whether Numbers 10 and 11 are happy to consign energy and climate security to a shrinking DECC ghetto marked ‘here be subsidies’.

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Reader comments


“If he’s right, the story here isn’t that green energy is any more expensive than expected; rather it’s that insulation isn’t well-supported enough.”

So instead of paying more on their bills, people will pay more in taxes or some sort of levy? Break out the champers! There we were thinking things were about to get more expensive thanks to the joy of green taxation and you’ve magically made a pile of money appear to take care of it.

“showing neighbours’ average consumption on energy bills,”

Otherwise described as grossly infringing peoples privacy to support your pet project.

“including popular technology like solar panels (which have no problem with take-up)”

Solar is not yet economic and it is likely to be some time before it will be in the UK given the glorious weather we tend to get. So either you have to subsidise it, (and raise taxes to pay for that subsidy) or you have to tax other sources of energy to the point that solar becomes economically viable, (vastly increasing the cost of energy).

“tweaking tenancies to incentivise landlords to take an interest in the efficiency of their properties.”

I’m prepared for my dinner of ‘Chapeau au Naturel” but I do believe you are once again suggesting that we either raise taxes or introduce subsidies that will have to be funded by other taxes.

As to the “Renewables Obligation” / “Carbon Price Floor” business you are entirely correct that we don’t need both; so let’s get rid of the idiotic Renewables Obligation, price carbon appropriately and let the market get on with it.

The point here is that more expensive energy is not only something that the green policies will bring, it is largely the point of having them in the first place because this will reduce consumption. Pretending that we can have cheap and green energy, (particularly when you’re apparently against nuclear power), isn’t currently possible and to pretend it is can only be the action of a knave or a fool.

I hate to pay devil’s advocate here – but the “green agenda” may serve to bring down the energy price over the next ten years. It is, after all, the cause of one of the only mitigations we have against soon-to-happen sharp rises in energy price designed to cover the cost of plugging the energy gap.

explanation:

This country has had a generation of liberalised energy markets. In that time the government claimed capacity was an issue for energy companies. However, in the same time government undermined the insentive for firms to invest in new capacity with artificial restrictions (via a range of pressures) on the price of energy.

Ironically the only area this has been well overcome is in the green energy sector. Projects there can be so small (solar panels on a residential roof being the obvious example) or support from government through various pricing mechanisms and planning support so strong – that at least these areas have seen investment thanks to a strong economic insentive.

Sadly we are now set to pay the price for the cheap energy of the last 20 years, since we are going to have to pay now for the energy capacity that we should have been funding development of during all of that time.

It is, in effect, classic market failure through externalities. Energy prices have to be high to generate the profit motive for investment in very expensive plants dependent on comodities with volatile prices – but society doesn’t accept that poor people should go without hot food, hot water and heated homes.

Green energy is a tiny marginal aspect to all of this. And the extent to which it is an aspect, it is set to reduce the needed increase in price as it has at least filled a small part of the energy gap we are facing and will have to pay a lot to plug.

note:

But of course it is politically more sensible for government to blame green energy and thus Labour than try to explain to a cash-strapped public that energy liberalisation had a very obvious flaw right from the outset that could have been relatively easilly resolved had the liberalising government been willing to cede just a little of its ideological zeal.

Green energy or dirty energy – our bills are going to rise a lot to pay for our poor management of our energy infrastructure over the last generation.

You have to pay out to get insulation in most cases. Sometimes you can get it back, but for poorer people this often isn’t an option. So they keep on paying higher bills. Then there are the rented properties. The landlords have no incentive to grant permission for this kind of work, since the bills are not in their name.

And a third is grossly underestimating the effect of feed-in tarrifs and other subsidies to otherwise utterly uneconomic “green” power – also known as RO generators, which have little to nothing to do with actual power generation.

Moreover, solar panels on roofs? The classic example of money being poured down a hole, the vast majority will never break even in the UK and are only viable via higher utility bills. Solar Water Heaters, perhaps, but not solar panels.

Consumption will fall this winter, but mostly because poorer people will be forced to use their utilities less (especially those on rip-off meters, whose rates now need urgent legislation to curb), not because of “green” efforts.

Most of the greens I know could care less about people sitting in the cold and dark, though.

Leon

As I say, I fear most of what you have put is something of a red herring when it comes to higher energy prices.

We are facing a period of rapid and costly investment in energy infrastructure because of 20 years of failure to resolve the conflict between wanting universal cheap energy and wanting a market driven energy sector.

@Margin4error – you honestly think that deregulation and competition is the problem? Really?

” government undermined the insentive for firms to invest in new capacity with artificial restrictions (via a range of pressures) on the price of energy”

Classic market failure there! Further, what’s the biggest barrier to more energy production? Couldn’t be getting permission to build the sodding power stations could it? Oh, another market failure, I’m obviously starting to come round to your rear before front views.

We can have cheap energy, we can even have fairly clean, (gas), power stations both quickly and cheaply. What we can’t have is massive carbon taxes or less direct equivalents and cheap energy, (as above, in the absence of a magical non-carbon emitting, cheap form of energy, this is what carbon taxes mean). Still, I’m sure that when we’re freezing this winter you’ll look down from your doubtless well heated abode and spare a thought for us.

@4 – Ah right, screw the poor then. £300 becomes £600 when your landlord’s put a meter in, and on a fixed income there’s NO way to feed it.

There are *plenty* of lower-cost alternatives. Nuclear power is a known cost, and not that expensive. Or there are the environmentally damaging, cheap options. Which WILL drive down the international prices, and lead to even more RO-farming…

But no, make em sit in the cold and dark.

When I saw the leaked letter it was so obvious that the Telegraph was over stating the costs that I included reference to their misrepresentation on my own blog; ‘Why can’t the Telegraph do simple Arithmetic?’

http://lazarus-on.blogspot.com/2011/09/why-cant-telegraph-do-simple-arithmetic.html

Moxham is only talking about an increase in part of the bill but it is also clear that the overall costs rely on the full range of policies and if the DECC is right or the policies are improved over the years there may be no increase at all. Perhaps the DECC is over optimistic as Moxham suggests but even so it is quite possible that the policies or improved ones in the light of this will reduce this potential increase significantly.

In any case it seems that by 2020, even if households are paying some more for energy costs, we will have an energy infrastructure more fit for future purpose than we would have otherwise.

Falco

Your overly aggressive post seems to be a result of not thinking very much about what you read. As such I’ll be brief with my response so you don’t have to think too much…

…Do I think de-regulation and competition are the problem? Obviously not. Hence my post said no such thing. Market liberalisation was fine and would not have led to weak investment in generating capacity if we had left the market to price energy as it saw fit, unhindered by social and governmental sensitivities.

Of course people would then have died of cold, hunger and disease when they couldn’t afford energy. Government’s unwillingness to acknowledge its own intervention in countering that outcome with soft and hard intervention meant it pretended there was no weakening of the market insentive to invest in new capacity for the long term.

The market, if left free, would not have a capacity issue over the next ten years. But it would have let a lot of people die. Government “fixed” the second scenario by intervening, and kidded itself that the market was still free so there was no impact of intervention on things like capacity investment.

In future try thinking before ranting. It leads to a better standard of rant. Or at least a better directed rant.

Leon

As I said before, I think you are blaming green energy for higher prices – when the cause is massive under-investment in any kind of capacity (green or not) over the last 20 years.

If government had done more to support investment in energy capacity (green or not) over the last 20 years we (bill-payers) would not be faced with having to fund massive massive investment in a ten year span.

Prices would have been a bit higher through the last 20 years, but they would not be set to shoot through the roof now.

oh – and keep the green energy aspect in proportion. It is a small part of capacity in the UK and so has a relatively small influence on the overall price of bills.

10. Margin4error

lazarus

DECC are under-estimating the cost – but you are right – once we get through this splurge of activity over the next ten years, we should have better capacity for another generation.

Margin4error

The DECC may well be underestimating the cost and Moxham may well be right – I’m no economist. But reading the letter it looks more like their underestimation is in the take up of efficiency measures by households without subsidy. This is more a policy problem than a cost estimation and could change.

For me personally I can only see an increase in bills as my home is pretty well insulated and my heating modern and efficient – there seems little I can do going forward to offset increases.

12. Margin4error

Lazarus

I should have said DECC are underestimating the cost – but Moxham is over-estimating the cost as well. In particular Moxham is too focused on one small cause of increased cost as opposed to the wider problems that need addressing.

And like you, there is not much I can do to offset increases in price. But then I guess we’ve had even cheaper bills in recent years for that reason.

13. Leon Wolfson

@9 – Of course I’m blaming things like feed in-tarrifs, which make energy companies pay uneconomic prices for energy, and wind-farms, where there true energy output is grossly over-rated, making them RO generators much more than energy generators.

Do you really think I’m that stupid I can’t see this? No, it’s a MAJOR proportion of bills.

We should have built the nuclear power stations years ago, yes, and need to do so now, and that should be funded by entirely dropping a number of expensive schemes and going with a carbon price floor only. If “renewables” are so great, then they’ll be able to compete in that environment.

(They can’t)

14. Margin4error

Leon

We’ll overlook that the RO system was designed to foster fledgling industries rather than solve the carbon problem for a minute – and agree that in itself it doesn’t serve as a practical means of tackling carbon emissions.

Basically your argument and mine are the same. We would not be facing this problem if we had invested in new capacity over the last 20 years. I’ve posted above why this didn’t happen – and had it happened we wouldn’t be facing higher energy bills over the next ten years to pay for filling the energy gap.

Where we diverge is that for some reason you think the tiny proportion of the energy market made up by things like windmills is key to understanding that lack of capacity – and massively increases bills – which just isn’t true.

To understand this – recognise that if renewables make up 10% of energy production – and this is typically three times more expensive than other energy options – bills would still only be about 20% more expensive than with no renewables.

hopefully that rather simple illustration will emphasise that the problem here is not really the government’s desire to foster new renewables technology companies and manufacturing in the UK.


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    Are Tories and Libdems fighting over green energy? Not exactly http://t.co/0WTgiU9

  2. Legal Aware

    Are Tories and Libdems fighting over green energy? Not exactly http://t.co/0WTgiU9

  3. GreenDeal

    Are Tories and Libdems fighting over green energy? Not exactly http://t.co/HKWED75 via @libcon

  4. sunny hundal

    Are Tories and Libdems fighting over green energy? Not exactly says @GaryDunion http://t.co/vdXXHH0

  5. Gary Dunion

    In my day job, I work in solar. Here are some things to bear in mind about that "green energy means £300 on bills" memo: http://t.co/dmlWufQ

  6. scot palmer

    Are Tories and Libdems fighting over green energy? Not exactly … http://t.co/AEYCmx8 -cool blog

  7. Ray Gatiss

    Are Tories and Libdems fighting over green energy? Not exactly http://t.co/2ZMtK6W via @zite

  8. Ray Gatiss

    arepcorp: Are Tories and Libdems fighting over green energy? Not exactly http://t.co/drVWxKl via @zite





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