Press release
Renewable Energy: the most expensive domestic policy disaster in modern
British history
In a new report Central Planning with Market Features: how renewable
subsidies destroyed the UK electricity market, published Wednesday 18
March, Rupert Darwall shows that recent energy policy represents the
biggest expansion of state power since the nationalisations of the 1940s
and 1950s – and is on course to be the most expensive domestic policy
disaster in modern British history.
Darwall shows that:
The electricity sector is being transformed into a vast, ramshackle Public
Private Partnership, an outcome that promises the worst of both worlds –
state control of investment funded by high cost private sector capital,
with energy companies being set up as the fall guys to take the rap for
higher electricity bills.
Post-privatisation gains in productivity are now being reversed as a result
of plunging labour productivity. By 2013, three quarters of the
productivity gains recorded between 1994 and 2004 had been lost.
Competition between electricity suppliers is an expensive sideshow (which
Ofgem estimated cost £730m in 2008) if it does not drive competition
between generators and market investment in the most efficient generating
technologies.
Government policies aim to hide the full costs of intermittent renewables,
which as a result are systematically understated. In addition to their
higher plant-level costs, renewables require massive amounts of extra
generating capacity to provide cover for intermittent generation when the
wind doesn’t blow and the sun doesn’t shine.
Highly subsidised wind and solar capacity flooding the market with near
random amounts of zero marginal cost electricity wrecks the economics of
conventional power stations. It is therefore impossible to integrate large
amounts of intermittent renewables into a private sector system and still
expect it to function as such.
As a result, the State has stepped in with a patchwork of interventions to
support prices. Because revenues are dependent on continued government
interventions, private investors end up having to price and manage
political risk, imparting a further upwards twist to electricity bills.
Without renewables, the UK market would require 22GW of new capacity to
replace old coal and nuclear. With renewables, 50GW is required, i.e. 28GW
more to deal with the intermittency problem. Then there are extra grid
costs to connect both remote onshore wind farms (£8 billion) and even more
costly offshore capacity (£15 billion) – a near trebling of grid costs.
No British government has yet to produce an analysis demonstrating
renewables are the most efficient way of cutting carbon dioxide emissions.
Neither has any government published any value-for-money analysis to
justify the use of high cost private sector capital against a public sector
comparator using the State’s balance sheet.
Including capacity to cover for intermittency and extra grid
infrastructure, the annualised capital cost of renewables is approximately
£9 billion. Against this needs to be set the saved fuel costs of generating
electricity from conventional power stations. For gas, this would be around
£3 billion a year at current wholesale prices, implying an annual net cost
of renewables of around £6 billion a year.
Intermittent renewables destroy markets
The above analysis leads to a straightforward conclusion. You can have
renewables. Or you can have the market. You cannot have both.
There are therefore two options to align ownership and control:
if renewables are a must-have – although no government has made a reasoned
policy case for them – then nationalisation is the answer; or
the state cedes control, ditches the renewables target and returns the
sector to the market.
Nationalisation removes political risk thereby cutting the sector’s cost of
capital. Together with the savings from abolishing retail competition, it
would cut average bills by around £72 a year now, and £92 from 2020. By
contrast, ditching the renewables target and returning the sector to the
market would save households around £214 a year, assuming gas replaces
renewable power. This option would depend on securing a permanent opt-out
from the EU renewables directive and any successor policy imposing targets
on individual member states.
Sir Ian Byatt: “Ministers have destroyed the emerging electricity market
while talking of how it could improve competitive processes”
As Sir Ian Byatt comments in the Foreword to the paper: “Ministers have
destroyed the emerging electricity market while talking of how it could
improve competitive processes. They and their advisers have not understood
that effective competition proceeds from the right structure of suppliers
and works in innovative, not predictable ways… Good intentions in the
form of a desire to save the planet have led to our impoverishment. We need
better analysis, greater transparency and more effective discussion of
social and environmental issues, not Whitehall playing shops. Rupert
Darwall provides us with the tools for such discussions in the area of
energy and, in his policy lessons, points us towards better approaches.”
http://www.cps.org.uk/files/reports/original/150313101309-HowrenewablesubsidiesdestroyedtheUKelectricitymarket1.pdf
-G]
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