Tony Lodge: How the Coalition is gambling with Britain’s energy policy

Tony Lodge is a Research Fellow at the Centre for Policy Studies.  His new pamhplet,The Atomic Clock: How the Coalition is gambling with Britain’s energy policy is published by the CPS and available to download here.

Over twenty years since Cecil Parkinson laid the groundwork for electricity privatisation and delivered the most liberalised electricity market in the world the Coalition is now planning to artificially fix the price of electricity in an effort to support more wind energy and desperately kick-start the building of new nuclear power stations.

The "market" for electricity, established 20 years ago after privatisation, is now largely undermined because there is no way it can deliver the expensive decarbonisation the Coalition wants.  Today, investment instead is driven by central planning and subsidies, which will be set to meet the wishes of the developers, particularly the "Big Six" energy companies. The monopolisation of the power market must urgently be re-addressed.

This oligopoly, in which four large continental companies are dominant, is set to enjoy an "arm lock" on this and future governments.  Prices will rise and economic growth will be held back in the attempt to meet the EU’s most ambitious green energy targets. 

New analysis shows the Coalition’s four part policy to deliver £200bn energy investment and  ambitious green energy targets risks raising the number of UK households in fuel poverty towards 8.5 million (a third of the total) by 2030.  As part of a rejection of a liberalised energy market, a new carbon price floor tax will be introduced next year, as well as new feed-in-tariffs to fix and guarantee the price of electricity for future new nuclear plants and green energy.

The price floor is a Treasury revenue-raising tool that will increase energy prices for both consumers and industry without guaranteeing new nuclear plant or reducing EU emissions.  The carbon price floor will tax the 75% (and growing) part of the UK electricity generating grid dependent on coal and gas and will help push UK energy prices higher than those in the rest of the EU.  The cost of this tax will be passed on to consumers and energy intensive industries.  Also, it will provide a £1 billion windfall to existing UK nuclear operators (EDF) and risks alienating other potential atomic investors.

The price floor also risks another "dash for gas" to cover the shortfall as new nuclear plants are delayed (they are already over two years behind schedule) and older coal plants close.  This could result with yet more dependence on gas and over one billion tonnes of economically recoverable UK coal reserves becoming "stranded" as the market for home coal production collapses before new clean coal plants are ready, possibly by the mid 2020s.

One of the main funding mechanisms being put in place to support new nuclear, the Carbon Price floor, could actually discourage plant construction.  The Carbon Price Floor aims to encourage investment in low-carbon technology by making generators pay a pollution tax for every tonne of carbon dioxide they emit, starting at £16 per tonne in 2013 and then rising to £30 per tonne in 2020 and £70 per tonne in 2030.

In that sense, it is similar to the European Union’s Emissions Trading Scheme (ETS), but permits are currently trading just over 40% of the cost of Carbon Price Floor proposed for next year, so the ETS price is deemed to be too low. The implication of this new unilateral UK policy is that the UK carbon market will no longer use ETS permits and its share of these will flood the European market, causing their price to drop even further (by up to about 20% during low emissions periods) and making it cheaper to produce fossil fuel energy on the Continent.  The price of carbon in the UK and in Europe could then differ hugely.

Perversely, this could stunt EU-wide investment in clean energy technologies as it will not cost as much to run carbon-emitting plants.  It will also massively increase the amount that UK taxpayers have to shell out for power;  electricity prices could more than double by 2030, putting a third of all British households into a state of ‘fuel poverty’, whereby 10% or more of household income goes on energy bills. This is liable to make the Carbon Price Floor highly unpopular with voters, which in turn could affect the government’s commitment to clean energy support and the future of the floor price’s trajectory.

For the first time since the early 1970s energy policy will take on a political edge and governments who mishandle this vital area of national responsibility will suffer at the ballot box.  Higher bills and job losses as a direct result of new interventions to meet impossible green targets are set to dominate Westminster in the run up to the next election.