Labour’s power play that might make or break the UK’s grid

Ed Miliband’s labour party conference speech last week made mention of splitting up the big 5 energy firms along with tighter regulation of the industry. And he proposed freezing energy prices for 20 months. Something which brought furious reaction from the industry and near shock horror from right leaning economists who thought we’d seen the last of government price fixing in the 1970’s.

The issue of energy is important as there has been a chronic lack of investment in the UK’s electricity grid for some time, which could lead to shortages in future. Now there is a lot of paranoia in this regard (often stirred up by energy industry lobbyists with hardware to sell). Indeed, I’ve just put up a rebuttal to the “disaster porn” that was C4’s recent program “blackout”. But certainly that’s not to say the risk isn’t real and there is a possibility of less reliable electricity and gas supplies in future.

Certainly I do agree with Miliband on one point, we can trace a good deal of the problems with the UK’s energy supply back to mistakes made during privatisation. However, I’m unsure whether his plans will work, or indeed whether they will just make the worst of a bad situation.

The energy monopoly game
Firstly it is worth reflecting on what went wrong with privatisation. As I’m regularly forced to point out to free-market types, privatisation can only work in a situation where it’s truly a free market with open competition. And the electricity market is about as far from that as North Korea. I mean it’s not as if I can get the neighbour’s cat to turn a wheel and generate power to run my house!

There is some wriggle room for customers to change suppliers. But there are only a handful of them, all of whom engage in lock step price rises anytime the wholesale price of gas goes up (yet are very slow to pass on any savings when it falls again). The spiv’s and speculators have essentially turned the UK’s energy market into a giant game of Monopoly where they can gamble with our money, heads they win, tails they win and we loose every time the quarterly bill arrives.

Unfortunately, there is very little incentive for the utilities to invest in the sort of major energy projects needed to prevent future shortages of electricity. After all, as the California energy crisis of the 2000’s showed an artificial shortage of power does not dent the spiv’s profits, indeed it can actually increase them significantly!

In other privatised industries (trains and water for example) there has similarly been a reluctance of privatised firms to commit to any major expansion projects, beyond simply ticking over and putting sticky plasters on leaking dam. This is largely because building the sort of infrastructure needed would involve the investment of hundreds of billions of pounds over many decades, which involves a considerable level of long term financial risk and essentially runs contrary to the make-a-quick-buck mentality of the current generation of city traders in control.

Energy Options
For example, the going rate for a nuclear plant for example is about £7-10 billion a reactor and we’d need 8-10 of them to just replace the plants scheduled to be decommissioned between now and the 2030…so that’s about a £100 billion to just replace existing nuclear capacity…plus a further £70 billion to decommission the existing fleet (with one assumes a similar amount to get rid of the new reactors once they reach the end of their service lives). And of course building a nuclear plant takes about 5-10 years and it’s unlikely we could build any more than 2 at a time (due to bottlenecks in the industry) which is an important consideration when you consider than all but one reactor will be shut down by 2023.

Natural Gas fired power is much cheaper to install, but there is the no-so small issue of climate change and where is the gas to run the plant going to come from? While there is considerable hype about shale gas reserves in the UK, this hype only extends as far as people who are poor at maths. As I’ve pointed out in my energy blog, the reality is that even if the protesters surrounding the rigs could be persuaded to go home (of course for quite a few, the drilling rigs will be in their back yard, therein lie the problem!), the shale gas potential of the UK (according to a Parliamentary report well supported by academic sources) amounts to, at most, 1.5 to 5.6 years of current UK natural gas consumption. Hardly the solution to the next 50 year’s worth of our energy!

Renewables are for these reasons increasingly looking like an attractive option, quite apart from the issue of climate change. The installation costs are higher than gas or coal, but lower than nuclear and you don’t have to worry about future fuel price rises.

The naysayers will often claim that a commitment towards green energy would cause bills to soar, indeed the Daily Mail mob often try to blame green energy for bills going up, as well as claiming that they are too unreliable to make up a substantial portion of the grid. Now I would counter these claims by pointing out that given that over 75% of the UK’s electricity currently comes from fossil fuels, the price of renewables are falling and the subsidy paid to them is being cut it would seem more logical to conclude that recent price rises are due to an increase in the wholesale prices of fossil fuels (or just plain price gouging by the utilities).

Indeed, it’s worth looking at other countries which have launched a comprehensive energy plan, which often rely heavily on renewables. Portugal is getting 70% of its electricity from a combination of wind, hydro and pumped storage, Denmark gets around 44% of its electricity from renewables (about 30% from wind alone) and Germany far from becoming more dependent on imports, renewables has had the opposite effect with the country increasingly exporting power. Furthermore, while energy prices did rise during the early phase of these programs, those prices are now either falling or at worst stabilising (as the utilities have a bed rock of renewables to call upon, insulating them from sudden rises in wholesale gas or coal).

And its also worth mentioning the French nuclear programme, which has also served to stabilise energy prices. Now, I’m somewhat critical of the French nuclear energy program. Notably because I’d question whether they’ve fully considered the full life cycle costs of nuclear power. But credit given where it is due, at least they have something resembling an energy plan.

The Plan? There ain’t no plan!
And that has been the problem in the UK since the 1990’s – we don’t have a plan! Successive governments, be they Tory or New Labour, have made various wishy washy speeches, issued white papers but otherwise done sod all. And without clear legislation and some sort of funding mechanism (i.e. like the sort of things the Germans or French brought in) the privatised energy industry (who are being asked to make extremely large and expensive long term bets) are essentially being asked to put themselves in a situation where they have everything to lose and nothing to gain.

And in fairness to the corporations, the UK government has often sent out very mixed and contradictory signals. In part this is due to the dangerous obsession of both Labour and the Tories towards nuclear power. For example despite the then Thatcher regime’s support for nuclear they failed to advance sufficient a subsidy and of the dozen or so reactors promised, only 1 (Sizewell B ) was actually commissioned, even despite considerable efforts to clear the path for nuclear, which effectively discouraged investment in any long term alternatives.

You have trodden on the forbidden lawn
I was once pro-nuclear myself, but have gone off it for various reasons, notably I studied engineering and realised what a significant engineering challenge building a reactor is, and that as a result it is and will likely always remain expensive energy. But also because I realised the nuclear lobby and its armchair supporters were going out of their way to kill off anything the perceived as an obstacle to nuclear power, even more practical ideas that could go a long way to solving our problems, e.g. Carbon Capture and Storage, energy efficiency, CHP, renewables, etc.

Casing point, one of the biggest lobby groups against wind energy is Countryside Guardian, which is stacked full of lobbyists for nuclear power. Its founder Bernard Ingraham, despite openly admitting that he doesn’t care much about the environment, he has all but admitted setting up the organisation to keep renewables off the forbidden lawn that is nuclear power’s turf.

As I highlighted as regards the last UK energy white paper, while it included a lot of high minded commitments towards “low carbon” energy it included no mention of how the government proposed to pay for it and involved a building schedule (in particular for nuclear) that wasn’t in any way plausible. One could be unkind and question whether it was written by a blind man living in a barrel (or perhaps nuclear lobbyists high on crack!).

One of the ways the Germans and Swedes cut winter heating bills and back up their renewables is by using CHP or district heating schemes (often using biomass or waste to energy plants). But there has, until recently, been no scheme in the UK to subsidise or promote such projects. And it took considerable arm twisting of labour in the last parliament to get them to commit to such a scheme. Consequently, the UK only has a tiny handful of such scheme’s while CHP makes up 25-45% of many European countries installed capacity. Of course this may have something to do with the fact that CHP tends to compete directly with nuclear, which may explain a reluctance to promote it.

In 2010, a proposed tidal energy project in the Severn was cancelled (again!), with then energy secretary Chris Huhne (since convicted of lying to the police), putting forth a stray man argument that a Barrage would be too expensive and that nuclear was cheaper. As I pointed out in my blog at the time, tidal energy (which unlike wind and solar power is regular and predictable) technology has moved on from a Barrage. Tidal stream turbines or tidal lagoons would be much cheaper, less of an issue for the environment and offer a pay-as-you-go option rather than an all-or-nothing barrage (indeed there are proposals to build just such systems in the Pentand Forth and a tidal lagoon in Swansea is being taken forward as we speak).

And of course nuclear was only cheaper if you believed everything the nice man from the nuclear lobby said! Real world experience in Finland (at Olkiluoto) and France (at Flamanville) suggests that nuclear energy is considerably more expensive than its lobbyists claim. A point backed up by reports from the New Economic Foundation or Citigroup bank and the position of academics in the field such Prof. Stephen Thomas from Greenwich university or Peter Bradford.

The Somerset Mafia
Ultimately the real reason why tidal power was cancelled in the Severn was to appease the “Somerset Mafia” aka to keep open a wedge on the UK’s energy grid for the future Hinkley point C and secure employment for the plant’s workers. Indeed casing point, Countryside Guardian originally opposed the construction of a wind farm not far from Hinkley crying crocodile tears over the “damage” to English heritage….yet they’ve been notably silent in their opposition to Hinkley point C being built on exactly the same site!

However, these events send yet another “trodden on the forbidden lawn” signal to many energy investors (both renewables, fossil fuels and others) who have since shown reluctance to commit to any major energy projects, given their fear that the UK government remains ideologically committed to nuclear and will just clear them out of the way for their “precious”. Consequently there has been yet more sitting on hands and waiting for the government to do something.

Reality bites
But despite all the “commitment” towards nuclear power from both labour and the Tory party, not a single reactor has been built since Sizewell B. In part this was because whenever the nuclear industry was asked if they needed subsidies they said no…then blinked three times ;D. It only dawned on the Tories last year, after the collapse of the Horizon deal (which would have built 4-5 reactors) that this blinking was the coded message that actually they do want subsidies, the industry was just reluctant to admit that (to avoid facing the thorny argument that if nuclear needs a subsidy, but wind turbines are unlikely to ever result in us glowing in the dark, why waste time with nuclear?).

The industry did come clean this year with the fact that they’d need subsidies, but they then revealed that the level of subsidy nuclear needs exceeds the overnight cost of wind energy (i.e. including the cost of back up). I would incidentally note that this is wholly consistent with what the sources I quoted earlier have been saying for over a decade (what a pity labour and the Tory’s didn’t listen too them!). The Tories have since baulked at the prospect of paying these high subsidies to nuclear, recognising that they exceed any commitment towards renewables.

And indeed my spies tell me that EDF have been laying off staff working on Hinkley point C. Although personally, I suspect that at least one of the two reactors will still go ahead (the government and EDF have simply too much to lose for either to back out now). But either way, this dithering over nuclear has again, led to more sitting on fences and little commitment to any new major energy projects by anybody.

What needs to be done
Consequently I do worry that Ed Miliband’s speech, thought well meaning, could not have been made at a worse time. My fear is that what few commitments towards new energy infrastructure the Tories and lib dem’s have managed to wriggle out of the energy industry will now get put on hold until after the next election, as they go back to a wait and see policy and fiddle while Rome burns.

Ultimately what the UK needs is not wishy washy populists speeches. It is a long term energy policy that’s actually going to work. And more importantly a policy that the industry knows is a plausible plan (i.e. one written by engineers, not lobbyists), that has cross party support (it is interesting that whoever won the German election, their present energy policy was unlikely to change) and has the necessary legislative teeth to insure it is implemented (i.e. heavy fines and a clear indication of no bailout with the utilities being taken to the cleaners if the lights do go out).

And pressure needs to be applied from both ends, i.e. not only forcing the utilities to add more power generating and storage (preferably low carbon energy, in particular more renewables) or the radical idea of free gas and electricity to customers with smart meters and energy efficient homes at off peak times.

But also on the consumer side, promoting energy efficiency measures, or ideas like “dynamic demand” (which allows devices that are on more or less all the time like storage heaters or fridges to vary demand, demanding less from the grid at peak times, and acting to store energy at other times). It also means changing building codes to enforce stricter energy efficiency standards (a central part of Germany’s energy plan) and more distributed power generation, again notably through renewables and CHP (again central to many other countries future energy policies).

Indeed its worth mentioning that a “Green Tea” movement within the Tea Party has recently begun to promote distributed power generation via renewables as an alternative to the near monopoly like behaviour of many large US energy utilities (get big corporations off my back kind of stuff).

And as far as nuclear is concerned, there is a need for clarity here. It obvious that nuclear power is going to need significant long term financial support, not just a simple subsidy as with wind or solar power. So rather than paying a French state owned company to build the reactors, because it’s against the Tories free market religion!, I’d nationalise the entire nuclear industry and set a clear mandate. This would indicate what nuclear’s share of the grid will be, how much it was going to cost (thus if we the taxpayers think its too expensive, we can vote for a party next election who oppose such spending), when and where the reactors will be build and where the waste is going to be buried…or just cancel the whole project, as its getting in the way of other energy options that actually work!

But ultimately what the UK needs is the government to do exactly what they have failed to do for 30 years when it comes to energy – Make important long term decisions. These may be unpopular in some quarters in the short term. As obviously a commitment to building lots of power plants (of any type) is going to temporarily push up bills and installing lots of kit is going to involve digging up lots of people’s back yards. But it is in the long term interest of the nation. Read, the lights stay on, and as in other countries, eventually we would see energy prices falling.

The window of opportunity to do this is closing fast. And I worry that Miliband seems to be signalling that he is as unwilling to do anything as the Tories have been, or indeed Blair or Brown were. Ultimately if the “light go out” in 2020, I will point the finger of blame not at the utilities (they are merely following the rules set by government) but at the three main political parties and they’re wholesale lack of commitment on this subject.

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3 thoughts on “Labour’s power play that might make or break the UK’s grid

  1. As is your wont, an excellent article.
    Incidentally a “casing point” may be oil industry jargon, but it means a part of an oil drill. What you meant to write was “case in point.” Sorry to be so picky! 😀

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    • I read the Guardian occasionally and I am Irish!

      Also should have mentioned in the article the point that despite the UK having some of the best wind resources in Europe, no turbines are manufactured here, even tho Germany, US, Spain, Denmark and Norway all do.

      Inevitably, one is forced to conclude that the fossil fuel and nuclear lobby’s have scarred them away and created a “chilling effect”.

      Like

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