Energy woes: We should replicate the best elements of Germany’s power sector transformation

Wind and solar power capacity are a key factor in driving down electricity prices

Share

To casual and expert observers alike, UK energy policy is now in a state of disarray. The political bluster this month over energy bills is likely to have overwhelmingly negative consequences – for bills, energy security, economic recovery, competitiveness and the environment.

Political gimmicks to freeze bills, deploy windfall taxes or unravel the mechanisms through which we attract energy investment are all unpalatable. These varied and misguided prescriptions offered in turn by Messrs Miliband, Major and Cameron to try and reduce energy bills, will do no such thing, and are likely to result in the following catalogue of problems.

First, in a politically uncertain environment companies will cancel or defer the investments they can until the situation clears up. Political risk in the UK energy sector has now risen regardless of who wins the next General Election in 2015, and in the interim less investment will take place than otherwise would have been the case.

This will make the UK more energy insecure and could increase power price volatility. Moreover, by messing around with large, capital intensive investments dependent on sound policy frameworks, billions of pounds of investment in the economy will be put at risk at a critical moment of our economic recovery. This could spill over into investor sentiment in other sectors beyond energy.

Second, in addition to the prospect of deferred or cancelled projects, increased political risk will now increase the cost of capital for projects that do secure financing or need refinancing. Energy is a capital intensive and long term business and so this will have a disproportionate impact on costs and will feed back into consumer energy bills. Bills will go up, not down as a result.

Third, Mr Miliband’s commitment to a price freeze will encourage the utilities to increase their prices now to preempt the impact of prospective price freezes in the future. Sir John’s proposed windfall tax will have the same affect. If you were a company threatened in this way, you would increase prices today while you could – to get your bonuses paid, pay your dividends etc – and then hope for the best. Given recently announced price rises, it looks like the Big 6 are taking exactly this strategy. Result: bills up, not down.

Fourth, by irresponsibly ignoring the real driver of rising energy bills - the wholesale price of gas - and proposing nothing to manage our exposure to this variable, we will be no better off.

Gas prices are set in an international market with the UK being a small player. The US shale boom has widened the gap between energy costs in that country and those in Europe, giving the US a competitive advantage. Unfortunately, the UK is highly unlikely to benefit from shale gas in the same way.

Bloomberg New Energy Finance analysis show that even under the most favourable case for UK shale gas production the UK will rely on continued imports, ensuring that our gas prices remain tied to European and world markets. The direct impact of UK shale on the cost of electricity in the UK will be limited as a result.

Finally, peddling myths that ‘green levies’ are the main driver of rising bills is dishonest and cannot be good for the standard of political discourse in our country.

According to UK government figures, in 2012 3.6% of our energy bills were the result of mechanisms that drive investment in low carbon energy or tax carbon pollution, while 47% came from wholesale energy costs and 20% from network costs. Between 2010 and 2012, wholesale energy costs are estimated to have contributed at least 60% of the increase in household energy bills, while 15% was the result of energy and climate change policies.

Instead of false narratives with counter-productive policy prescriptions, we need cross-party consensus on an energy policy that is both longer term and designed to future proof us against volatile, international commodity markets over which we frankly have little or no control. We should aim to steadily drive down wholesale prices to the benefit of industry and consumers, while ensuring we do so fairly, and in a way that reduces pollution and environmental impact.

We should replicate the best elements of Germany’s power sector transformation, while ditching the excesses. The German strategy has relied on transitioning towards energy sources where marginal costs are close to zero because the sun shines and the wind blows for free. Increasing levels of wind and solar power capacity have been a key factor in driving down wholesale electricity prices in Germany. They fell from over €80 per MWh at peak hours in 2008 to just €38 per MWh today and renewable energy now supplies 22% of Germany’s electricity demand on average.

This increase in renewable power has been driven by unsustainably generous subsidies. But today the cost of renewable energy is so much lower than it was when the Germans started implementing their energy transformation. They have locked in high subsidies, but we can now secure much more ‘bang for our buck’.

We can now build renewable energy at prices that are increasingly competitive. Since 2009 the costs of onshore wind and solar PV have fallen by 15% and 44% respectively, which makes well-located renewable power cost-competitive with coal and gas without subsidy. Their costs will continue falling. This should be the story driving UK energy policy, not the current outburst of collective irrationality.

Ben Caldecott is Head of Government Advisory at Bloomberg New Energy Finance, a Programme Director & Research Fellow at the University of Oxford’s Smith School of Enterprise and the Environment, and a Trustee of the Green Alliance think tank.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

SAP Project Manager

competitive: Progressive Recruitment: SAP PROJECT MANAGER - 3 MONTHS - BERKSHI...

SAP Project Manager

competitive: Progressive Recruitment: SAP PROJECT MANAGER - 3 MONTHS - BERKSHI...

Senior Investment Accounting Change Manager

£600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

Microsoft Dynamics AX Functional Consultant

£65000 - £75000 per annum + benefits: Progressive Recruitment: A rare opportun...

Day In a Page

Read Next
Children of a bygone era  

Kids these days aren't what they used to be — they're a lot better. So why the fuss?

Archie Bland
A suited man eyes up the moral calibre of a burlesque troupe  

Be they burlesque dancers or arms dealers, a bank has no business judging the morality of its clients

John Walsh
Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices
Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

Could smartphones soon be diagnosing diseases?

Health Kit and Google Fit have been described as "the beginning of a health revolution"
Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

Can we learn to love Ryanair again?

Four recent travellers give their verdicts on the carrier's improved customer service
Billionaire founder of Spanx launches range of jeans that offers

Spanx launches range of jeans

The jeans come in two styles, multiple cuts and three washes and will go on sale in the UK in October
10 best over-ear headphones

Aural pleasure: 10 best over-ear headphones

Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel
Commonwealth Games 2014: David Millar ready to serve up gold for his beloved Scotland in the end

Commonwealth Games

David Millar ready to serve up gold for his beloved Scotland in the end
UCI Mountain Bike World Cup 2014: Downhill all the way to the top for the Atherton siblings

UCI Mountain Bike World Cup

Downhill all the way to the top for the Atherton siblings
Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

A former custard factory, a Midlands bog and a Leeds cemetery

Introducing the top 50 hidden spots in Britain
Ebola epidemic: Plagued by fear

Ebola epidemic: Plagued by fear

How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

From 'Parks and Recreation' to 'Guardians of the Galaxy'

He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star