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

iJobs Job Widget
iJobs General

Information Security Manager (ISO 27001, Accreditation, ITIL)

£70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

C# Developer (HTML5, JavaScript, ASP.NET, Mathematics, Entity)

£30000 - £45000 per annum + Benefits + Bonus: Harrington Starr: C# Developer (...

C# Integration Developer (.NET, Tibco EMS, SQL 2008/2012, XML)

£60000 - £80000 per annum + Benefits + Bonus: Harrington Starr: C# Integration...

Biztalk - outstanding opportunity

£75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

Day In a Page

Big deal: Changing what we eat must be a better option than cutting into people’s stomachs  

Gastric bands are as useful as a plaster on a severed artery

Zoë Harcombe
Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

How Saudi Arabia helped Isis take over northern Iraq

A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

The evolution of Andy Serkis

First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

You thought 'Benefits Street' was controversial...

Follow-up documentary 'Immigrant Street' has got locals worried
Refugee children from Central America let down by Washington's high ideals

Refugee children let down by Washington's high ideals

Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
Children's books are too white, says Laureate

Children's books are too white, says Laureate

Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
Blackest is the new black: Scientists have developed a material so dark that you can't see it...

Blackest is the new black

Scientists have developed a material so dark that you can't see it...
Matthew Barzun: America's diplomatic dude

Matthew Barzun: America's diplomatic dude

The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

Meet the 'Quantified Selfers'

From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

Five-star reviews are just the opening act for British theatre's first non-white artistic director

Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
Mrs Brown and her boys: are they having a laugh?

Mrs Brown and her boys: are they having a laugh?

When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor
Gavin Maxwell's bitter legacy: Was the otter man the wildlife champion he appeared to be?

Otter man Gavin Maxwell's bitter legacy

The aristocrat's eccentric devotion to his pets inspired a generation. But our greatest living nature writer believes his legacy has been quite toxic
Joanna Rowsell: The World Champion cyclist on breaking her collarbone, shattering her teeth - and dealing with alopecia

Joanna Rowsell: 'I wear my wig to look normal'

The World Champion cyclist on breaking her collarbone, shattering her teeth - and dealing with alopecia
Bill Granger recipes: Our chef gives raw ingredients a lift with his quick marinades

Bill Granger's quick and delicious marinades

Our chef's marinades are great for weekend barbecuing, but are also a delicious way of injecting flavour into, and breaking the monotony of, weekday meals
Germany vs Argentina World Cup 2014 preview: Why Brazilians don't love their neighbours Argentina any more

Anyone but Argentina – why Brazilians don’t love their neighbours any more

The hosts will be supporting Germany in today's World Cup final, reports Alex Bellos
The Open 2014: Time again to ask that major question - can Lee Westwood win at last?

The Open 2014

Time again to ask that major question - can Lee Westwood win at last?