Keeping The Lights On: the Politics of Cheap Energy

British policy is not rooted in economic reality but dictated by the Green Blob. It is time to break a consensus that is costing us dear  

Energy Features
Fractions on fracking: David Cameron at a future drilling site (photo: Crown Copyright)

British government energy policies instituted by the last Labour administration and carried on by the Coalition have driven up prices for the consumer, at the same time discouraging investment in essential infrastructure. It is unlikely — though not impossible — that the lights will go out this winter as a result, but the situation will get worse before it gets better. Altogether, it provides a classic example of ill-directed government action in response to changing political fashions.

Government has a duty to ensure a safe, continuous and affordable supply of energy to people and businesses. This is the case as much with an energy system based on free market principles — as in the United Kingdom — as it is in authoritarian command economies. The question is how best government should fulfil its duty, when and if it should intervene, and what instruments it should use.

The coal and steam energy that powered the industrial revolution was developed by private enterprise in often chaotic and dangerous conditions. Yet it utterly transformed Britain and the world, lifting mankind out of poverty and dependence on wind, water and wood energy. Intervention was first addressed, in the early 19th century, to improving safety in the mines, and to controlling the age at which children could be sent down them. The first attempts at regulation were moral rather than economic. Later, with the arrival of petroleum and electricity — also at first privately developed — central government began to take a more proprietorial interest. Winston Churchill as First Lord of the Admiralty was behind the establishment of the company, now known as BP, which discovered the first Iranian oilfields in 1908. The idea was to secure the fuel required by the Royal Navy as it shifted from coal to oil.

The postwar Labour government nationalised the mines as well as the generation and distribution of electricity. It built the National Grid, and many new coal-fired power plants. These were great and necessary achievements. Succeeding administrations added the nuclear power programme, the world’s first but alas not the most effective. Private industry discovered and developed the North Sea oil and gas reserves, but was excluded from the marketing of the gas. By the 1970s the state controlled — in a manner of speaking — an expensive and inefficient energy complex centred on the National Coal Board, British Gas, the Atomic Energy Authority and the Central Electricity Generating Board. Astonishingly, the government still owned a large chunk of BP shares.

During the 1980s, the triumph of the free oil market over the Organisation of Petroleum Exporting Countries (OPEC) cartel was brought about by the UK’s Brent crude benchmark, encouraged by the Treasury. Mrs Thatcher’s privatisations and market liberalisations slashed the Gordian knot at the heart of British energy and handed control of the gas and power markets to private companies — including formerly state-owned ones. With intelligent regulation, the industry developed well-functioning wholesale markets — although gas was always more liberated than power — which delivered the cheapest energy prices in the European Union for more than a decade.

But while rising prices naturally rouse protest, falling or low prices are taken for granted. Politicians had created the conditions that led to a benign market revolution but the very fact of liberalisation meant that they took their hands off the levers and, over time, lost interest. Until, of course, the shadow of global warming grew too dark to ignore, and a new moral imperative (however dubious) entered into political calculations.

In his great novel Nostromo, Joseph Conrad (a Polish outsider in the British merchant marine) shrewdly observed the fatal British propensity for high-minded action, however ill-directed. Charles Gould has inherited a bankrupt silver mine in Sulaco, a corrupt South American country. He is determined to resurrect the mine and use the wealth to rescue Sulaco.

The mine had been the cause of an absurd moral disaster; its working must be made a serious and moral success. Decoud, a journalist who will later become one of its chief victims when the plan goes awry, says to Mrs Gould:

“But, then, don’t you see, he’s an Englishman?”

“Well, what of that?” asked Mrs. Gould.

“Simply that he cannot act or exist without idealising every simple feeling, desire, or achievement. He could not believe his own motives if he did not make them first a part of some fairy tale. The earth is not quite good enough for him, I fear.”

This is emblematic of the obsession with global warming and the need to reduce carbon emissions which has seized the British body politic since 2000. Of course it was driven by the UN Intergovernmental Panel on Climate Change (IPCC) and the various green pressure groups and their initially unchallenged command of the media. And it is true that the European Union as a whole also embraced this ideology, and instituted far-reaching structural changes to national electricity markets, indeed began to do so well before the UK did.

But there was something blind and obsessive about the way successive British governments took on the challenge. It has been characterised by a total focus on increasing the use of renewables while ignoring the rest. There has been a particular failure to understand the many advantages to the UK of using gas-fired power, despite its central role in reducing power prices and ensuring energy security over the past two decades.

In May 2007, the ignoble Lord Truscott, energy minister and Labour placeman, presented a White Paper on energy which set the sorry standard for government self-deception and double think on this vital topic. At the press launch I thumbed through the 344 pages of verbiage on the green and sustainable future envisaged for us. Among the delirious projections for 2030 and 2050 I sought in vain for any word on what would fill the generation gap looming in the decade after 2010: the immediate future in energy investment terms. There was nothing. I infuriated Truscott by suggesting to him that natural gas was the fuel that dare not speak its name.

Afterwards I spoke to a couple of the civil servants who had actually written the White Paper. “Why doesn’t it say anything about the new gas-fired generation that will have to be built to keep the lights on during the next decade?” They grinned conspiratorially, and replied that if not explicit it was implicit in the analysis. Which would be fine if it had happened, but it hasn’t.

The following year the Labour government established the Department of Energy and Climate Change (with Ed Miliband at the helm) and passed the Climate Change Act, which committed the UK to cutting carbon and other greenhouse gas emissions by 26 per cent in 2020 and 80 per cent by 2050. It also established a peculiarly British quango, the Committee on Climate Change (CCC), composed of august chaps who knew in advance what sort of advice they must offer the government.

The advent of the Coalition government in 2010 only accelerated the process, with Liberal Democrats in charge at the DECC, and the Tories largely maintaining the blue-green line established by David Cameron when in opposition.

The result has been a bonanza for investors in wind generated power, and stagnation elsewhere. Unable to rely on the signals emanating from government, private industry has contented itself with soaking up the renewable subsidies, while deferring investment in the only serious medium-term solution to the looming power crisis, combined cycle gas turbines.

The more renewables are connected to the grid, the higher the overall level of subsidy that needs to be paid by consumers: prices rise as a result, which creates a new political imperative, namely cheaper energy. Government has responded by blaming the energy companies, and implementing, in the usual British way, a series of official inquiries.

It has been a constant theme of the propaganda — sorry, analysis — emanating from DECC and the CCC that world market prices for gas and oil are going to rise steadily over the coming years and decades. In fact they have fallen, which means the subsidies for green energy — and the hideously expensive new nuclear plant at Hinkley Point — will have to increase.

Scenario planning is a normal part of business life. All big companies do it, but most of them recognise that their scenarios are constantly being bent out of shape by events. The British government on the other hand elevates its scenario planning to the level of policy, and then slavishly implements it, whatever may be happening to change the real world scenario around it.

In technical terms, the decisive energy development of the 21st century has been successful and cheap fracking. It has wrecked everyone’s scenarios. Along with a vast potential increase in global hydrocarbon reserves, fracking has seriously cut oil and gas prices. The recent $35/barrel (30 per cent) drop in crude prices is a taste of what may come as the United States ramps up shale hydrocarbons production and becomes a net exporter of oil, gas and coal.

Unlike the US, Britain has singly failed to exploit its clearly very considerable shale resources. There are legal reasons — ownership of the substrate is different here — but mainly it is because politicians are unwilling yet to face the wrath of the anti-frackers. Backing shale would also be a vote for a new source of carbon-based fuel (albeit a relatively clean one), and that would contradict the entire thrust of energy policy. To make it happen, HMG would really have to throw its weight behind shale exploration and turn on the Green Blob that has dictated policy for the past ten years.

One way in which it could do this is to stress the likelihood of cheaper gas cutting household gas and electricity bills. The more shale gas Britain produces, the less it will have to import, enhancing energy security. And the more gas replaces coal in power generation, the lower our carbon emissions.

That would seem a reasonable solution to the so-called “energy trilemma” beloved of policy-makers around the world: how to reconcile the competing requirements of affordability, security and sustainability.

There are signs that elements on the Right of British politics are waking up to this. UKIP wants to scrap all renewable subsidies and promote fracking for shale gas. The Tories are divided, with the modernising social liberals clinging to current policies. But in October, Owen Paterson, recently sacked as Environment Secretary, told the Global Warming Policy Foundation:

Our current policy will cost £1,300 billion up to 2050. It fails to meet the very emissions targets it is designed to meet. And it fails to provide the UK’s energy requirements. Current energy policy is a slave to flawed climate action. It neither reduces emissions sufficiently nor provides the energy we need as a country. I call for a robust, common-sense energy policy that would encourage the market to choose affordable technologies to reduce emissions.

This was an important speech, under-reported by the mainstream media. Whether it represents a turning of the tide within the Conservatives must be open to doubt so long as David Cameron heads the party. His instincts are always to tack towards the centre and, as far as practical, towards the left of British public opinion.

But Mr Cameron and his advisers should consider that Ed Miliband’s cynical promise to freeze household energy prices from 2015 risks not only further delay to vital infrastructure investment but may also presage renationalisation of parts of our energy industries. For the first time in a generation, the Tories have the opportunity to open up a real and principled gap between themselves and their opponents, offering a future of self-reliance, cheaper energy, lower carbon emissions and the end of a heedless dash towards inefficient renewables.
To pull that off, the Tories would have to bind themselves to a new moral imperative, this time one of their own creation. This is unlikely in the time remaining. But any Englishmen who still read Conrad may consider that for all the striving and suffering in Nostromo, the Sulaco silver all ended up at the bottom of the sea.