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Can we wait for renewables?

Article by Rob Blackhurst

September 15, 2006

Even the term Energy policy seems as steeped in the 1970s as smoky boardrooms and the closed shop. Mrs Thatcher downgraded the Department of Energy into an adjunct of the DTI for ideological reasons. The title smacked of economic planning, she felt, whereas our energy needs should be decided by the market. When Labour came into power in 1997 it seemed that this trend would carry on. Apart from a moratorium on gas-fired power stations to give coal a breathing space during a period of low gas prices, there was little market interference. With the reform of electricity trading arrangements, Labour were able to promise that that households would see a 10% fall in the costs of energy prices.

But two trends have conspired to give energy policy an unexpected rebirth. The experience of California showed the dangers of Governments prioritising low cost energy above all else. In 1996, California began liberalising its market, legislation was poorly designed in that it forced utilities to buy gas at increasing prices, but didn’t allow them to pass on the costs to consumers. As gas prices increased, they began to trade at a loss, and so, since most were relatively small businesses, they went bankrupt rather than continue to accumulate losses In the summer of 2003, similar trends could be seen across Europe. In Britain, the “dash for gas”, when new generators piled into the market to win spoils under the previous electricity trading arrangements, led to overcapacity. The government’s changes to electricity trading arrangements made energy prices plummet, which in turn is removing suppliers from the market as generators closed or mothballed power stations. Like in California during the nineties, there is no incentive to invest in new generation, apart from subsidised renewable power. As the BBC dramatically illustrated in their prime-time docu-drama “If”, there are real dangers that the lights could go off here.

The structural problems with liberalisation have been matched by a greater reliance on more unstable regions for our energy. The near exhaustion of Europe’s indigenous gas supplies will leave all European states heavily dependent on imported gas from potentially unstable regions – including Russia, the Central Asian Republics and the Middle East. This has given governments added incentive to consider dusting off home-grown forms of energy that are not at the end of a very long and unstable pipe-line. In the doomsday scenario, we may end up with fundamentalist regimes that are unwilling to trade with us. As Dan Plesch from the Royal United Services Institute has written: “imagine an Islamic Pol Pot intent on winning the clash of the civilizations. He would have every incentive not to sell us oil”.

September 11 led to a reappraisal in the US of their reliance on Middle Eastern oil. Risks of instability aside, the price of relying on autocratic regimes for oil supply became apparent. The costs of the Faustian bargain– in which the west tolerated states that repressed their own people as long as the oil taps were kept open – seemed too high when that repression bred terrorism that was directed at the West. The neo-conservatives shared an agenda with human rights campaigners on the left in their determination to wean themselves off a reliance on the Middle East. The economic costs of deploying US troops in the region are also becoming politically significant. The US Energy Department’s Oak Ridge Study in 2000 estimated that the costs of oil dependency were three trillion. And in the Democratic primaries, John Kerry got the loudest cheer of the night when he promised to give America the security of energy independence because “our sons and daughters should never have to fight and die for Mid-east oil”.

But the biggest reason for a renewed interest in energy policy is, of course, climate change. Sir David King, the Government’s Chief Scientific Advisor, warned recently that global warming was a greater world threat than international terrorism. Britain has taken an international lead by promising to reduce carbon emissions by 60% by 2050. But these good intentions fail to match the reality of what is happening to our power stations. Over the next twenty years, Britain’s non-carbon generating nuclear power plans will reach the end of their useful life and close, removing at a stroke most of the energy that is produced by clean sources. Currently, nuclear power provides 23% of the UK’s electricity needs. If left to the market, this will all be replaced by cheap fossil fuels.

The Royal Society has called for a new generation of nuclear power stations. But the green movement remain staunchly opposed, as Stephen Tindale argues in this exchange. The Government, too, has been lukewarm, given the huge costs and public relations obstacles of any move to nuclear. The 2002 White Paper on Energy suggested that the skill base of the nuclear industry should be maintained, but stressed that they would not push this option. It would be up to the market to decide. Instead, they have placed their faith in a big expansion of renewable energy. This will require a revolution: currently only 2.5 per cent of the UK’s electricity comes from renewable sources – even though there is a target to increase this to 10% by 2010 and 20% by 2020. Though there has been a quickening of progress, it is almost impossible to find an expert who believes this first target can be reached. However, as Stephen Tindale points out, massive increases in renewable capacity are possible. Already in Denmark 18% of energy comes from wind power.

Debates on energy often fail to consider what is happening in the rest of the world. Though nuclear power has an uncertain future in the UK, it is being actively considered in Finland, Brazil, Sweden and Japan and the US. Nuclear energy was the fastest growing source of electricity in the 1990s. But the immediate cost implications, together with the unresolved issue of how to permanently dispose of nuclear waste, means that few British politicians have been vocal in its support. This may change when Britain decides on a permanent waste facility, as the US has already done in New Mexico. But the question of whether Britain can afford to close its nuclear capacity if it is to reach its environmental targets cannot be ducked forever.

Rob Blackhurst, Editorial Director, Foreign Policy Centre.

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