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Fracking fracas: Cameron should ignore the protests over shale gas

Electorally, Ed Miliband is on to something with his pledge to freeze British energy prices for two years. "Hard-pressed families" would welcome an end to regular price rises as well as greater certainty in their energy bills. There is a smell, if not of failure, at least of ineffectiveness in retail competition, especially in the electricity market. As the new nuclear deal with EDF confirms, the Conservatives and Liberal Democrats have been busily piling on the costs in pursuit of a low-carbon future: it will take some smart back-pedalling by the Tories in particular to put themselves in a position to offer an effective lower-cost alternative — with or without successful shale exploration.

It may not matter much that Labour began the process when it was in power, and Ed Miliband himself was the last Labour secretary of state for energy and climate change. The Coalition picked up Miliband's ball in 2010 and has been running hard for the goals set by the Climate Change Act of 2008: that 30 per cent of our electricity should be generated from renewable sources by 2020. And (though no one admits this) damn the cost.

Under the Coalition Agreement, the Department of Energy and Climate Change (DECC) is a Liberal Democrat fiefdom whose ministers and officials blame all increases in energy bills on the wholesale market. They also blame the utilities for being greedy and uncompetitive. And they deliberately obfuscate the effects of their own policies. Yet their policies are the main drivers of the price increases and the main reason that energy markets have become less effective.

The principal method until now has been to subsidise the cost of renewables by hidden charges on ordinary consumers' tariffs, known as the renewables obligation. These subsidies, expressed in £ per megawatt-hour, are added on to the wholesale market price achieved by each generator. An onshore wind farm is paid an extra £37/MWh on top of the market price, currently £52/MWh; an offshore wind farm gets an extra £84/MWh, or a total of £136/MWh, 2.6 times the wholesale price.

Once the energy bill before parliament is passed later this year, the renewables obligation will be replaced by a system of contracts for difference (CfDs) which will fix strike prices for different forms of renewables and, importantly, new nuclear. Every contract for difference will be negotiated with each generator by a government agency, affording plenty of scope for bureaucratic muddle.

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It doesn'tadd up...
November 14th, 2013
9:11 PM
It's a shame this article is marred by some factual inaccuracies, as the general thrust of it is right on target. But it was the great consolidation of 2002 under Labour that created the Big 6 - not John Major. Forward natural gas trades around 60 p/therm, or £20/MWh - not £60/MWh - making the percentage impact of the carbon floor price three times as great. The impact on power bills is further amplified by the fact that the charge is on gas input, not power output, which effectively doubles it by the time transmission loss is allowed for. Much larger charges apply to coal sourced generation - roughly double again. I detect no worries in Parliament about Ed Davey's Expensive Energy Bill: it passed the Commons by 396 to 8 with support from across the House. The Lords just added to the misery by effectively banning coal stations from supplying baseload power - although that amendment was only supported by Lord Deben among so-called Tories: that will of course add to our bills still further.

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